Chinese Foreign Direct Investment in the United States
By: Yohsuke Aoki, Dong Liu, Shaoyu Sun, Tian Wang, Xi Wang, Annie Yang Zhou
Columbia University School of International and Public Affairs
Capstone Project for:
Joshua Meltzer, The Brookings Institution
with
Dr. Irene Finel-Honigman, IEFP, Capstone Advisor
1
Executive Summary
The Sino-U.S. relationship has become the prevailing issue on the U.S. economic, foreign
policy and defense agenda. During the recent presidential election period, President Obama
and his administration have repeatedly mentioned China as a strategic competitor but
increasingly as a strategic partner, particularly in areas of trade, innovation and economic
cooperation. In fact, the U.S. has seen a surge in Chinese FDI in the natural resources,
traditional and renewable energy and manufacturing sectors in the years following China’s
entry into the WTO.
This paper examines the trends and industries for Chinese FDI in the U.S. as well as its
economic, political and national security implications and presents two comparative
analyses of Japan’s FDI in the U.S. and Chinese FDI in Canada and Australia. This is
particularly important in a time of growing distrust between the two countries given
heightened economic and security concerns. What is the current legal and regulatory
framework for FDI and what are the major players, CFIUS and the Obama cabinet doing to
address growing concerns? Given recent cases of FDI under review, such as CNOOC and
Ralls, does CFIUS require regulatory reforms in order to refine its mandate and process?
This paper presents a number of immediate, medium and long-term policy
recommendations and addresses the ways by which the U.S. and China can collaborate to
reduce the trust deficit. This is based on qualitative research through a series of interviews
with professors and officials, guest speakers and lectures, as well as extensive quantitative
research through academic and industry reports, trade publications and the most current
newspaper and magazine articles.
Specifically, the recommendations include the following:
- advocate for more frequent and industry-specific dialogue
- promote better relations through commercial, trade and cultural organizations (nonpolitical actors)
- push for more timely, accurate and consistent official data in both the U.S. and China
- enforce greater transparency in U.S. legal and regulatory framework and CFIUS process
reform, while expanding CFIUS mandate to guarantee national security interest
- encourage greenfield investments as a means to create jobs in the U.S. as well as more
portfolio investments
- enforce better governance and greater accountability of Chinese companies
This set of policy recommendations are meant to create a more level playing field and to
build a sustainable and mutually-beneficial long-term relationship.
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Table of Contents
1. Introduction: Background and Overview……………………………………………………………………4
2. Economic Issues………………………………………………………………………………………………………10
3. Political Issues………………………………………………………………………………………………………...19
4. National Security Concerns………………………………………………………………………………………25
5. Policy Recommendations…………………………………………………………………………………………37
6. Conclusion………………………………………………………………………………………………………………44
7. Appendices……………………………………………………………………………………………………………..45
8. References………………………………………………………………………………………………………………51
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1. Introduction: Background and Overview
After more than three decades since China opened its doors to the rest of the world,
the Sino-U.S. rapport has become arguably the most critical and strategic relationship of
this century. For a long time, China has been a popular destination for investments from
developed nations. In the past decade, with changing economic dynamics in China’s
domestic market after years of fast-paced development, China also accelerated its direct
investments in the advanced economies. However, China has increasingly faced obstacles
towards its investments in the U.S. based on national competitiveness, lack of transparency
and security considerations. Given that the U.S. and China have both experienced major
recent leadership transitions, President Obama must establish a more concrete action plan
and policies with his new Chinese counterparts to create a more sustainable and mutuallybeneficial relationship based on increased trust. These policies must address current issues
from the top down, from high-level and industry-specific dialogue to working with
regulatory bodies to create a more friendly environment for Chinese inward foreign direct
investments.
According to Brookings Senior Fellows Ken Lieberthal and Jonathan Pollack in their
“Campaign 2012” paper advising the president, they indicated that the Sino-American
relationship had fallen “well short of expectations” since President Obama’s November
2009 visit to Beijing. Given the trust deficit and continued concerns about unfair practices
between the two countries, many of the long-term economic and trade policy objectives
have not yet been addressed or resolved. Most of the U.S. concerns stem from China’s
reluctance to allow the renminbi to free-float and appreciate against the U.S. dollar,
government subsidies, funding for government-controlled firms, and U.S. companies’
inability to gain full access to China’s domestic markets.
Overview
Though media attention has been focused on Chinese outward Foreign Direct
Investment (OFDI) into the U.S., its amount is still miniscule compared to other developed
countries’ outward FDI into the U.S. To date, its stock only accounts for less than 1% of the
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total FDI in the U.S. However, it is growing rapidly and its upward trajectory is expected to
continue despite occasional setbacks. The takeoff of Chinese FDI in the U.S. is clear. From
2001 to 2007, Chinese direct investments in the United States averaged well under $500
million, with the exception of 2005, when Lenovo’s $1.75 billion acquisition of IBM’s
personal computer unit caused a spike. After 2007, the trend started to tilt upwards both in
the number and value of the deals. The gross deal value grew even more precipitously,
reflecting a steady increase in the scale of individual projects. Large sums of U.S. dollars
held by the Chinese, which have accumulated through China’s trade surplus over years,
have incentivized them to proactively look for investment opportunities in America.
Chinese firms are also encouraged by the government policy to “go global” in order to
diversify China’s holdings, obtain resources, technology, brands, and managerial know-how,
as well as to circumvent trade barriers.
The tremendous surge of Chinese outward FDI bears far-reaching implications for
the American economy, politics, and national security, which will be thoroughly discussed
in the following sections of this paper. It is well acknowledged that FDI is beneficial for
both the home country and the host country, as it allows firms to explore new markets and
operate more efficiently across borders, thereby reducing production costs, increasing
economies of scale and promoting specialization. It is particularly important to have local
market presence when serving overseas markets. In addition, FDI leads to better prices for
firms looking to divest assets due to a larger and more competitive pool of bidders as well
as more choices and lower prices for consumers. To local communities, foreign investments
bring new jobs, tax revenue, and knowledge spillovers from worker training, technology
transfers and R&D activities.
On the flipside, as summarized by Meunier, the influx of Chinese direct investment
dollars poses unprecedented challenges to the U.S. because historically, direct investments
flowed almost exclusively from the developed world to the developing economies.
However, the reverse trend of China emerging as an increasingly important global investor
brings about a great deal of uncertainty. Next, in terms of political structure, the fact that
Chinese investors operate under an authoritarian political regime is particularly
disconcerting to the U.S. Despite the often opaque ownership structure of Chinese private
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and quasi-private companies, it has been estimated that cumulatively, almost two thirds of
the stock value of Chinese FDI comes from state-owned enterprises or state-controlled
entities, which adds to America’s suspicion that these companies are acting to fulfill
strategic rather than commercial goals. Last but not least, because of China’s non-ally status
and its poor track record with respect to its dealings with North Korea and the like, there is
enormous fear in the U.S. for the risk of enabling commercial and state espionage bringing
in Chinese investment.
M & A vs. Greenfield
In terms of the entry mode for Chinese capital, the majority of Chinese outward FDI
to the United States has initially taken the form of greenfield projects, mostly in setting up
sales offices or distribution channels to facilitate trade. In fact, the share of greenfields in
total Chinese investment outflows was higher than that of the U.S. average for other
countries before 2009, but mergers & acquisitions (M&A) are growing faster and poised to
surpass greenfield projects.
According to Rhodium Group1, from 2000 to 2012, 620 deals2 were recorded, of
which 436 consisted of greenfield projects and 184 were M&A. The total estimated value
amounted to $22.7 billion, of which acquisitions accounted for 85%, or $19.4 billion as
opposed to the $3.3 billion coming from greenfield projects (see Figure 1 and 2). The
dominance of acquisitions in terms of value can be explained by the high price tags on
several major purchases. It warrants noting that, several controversial cases
notwithstanding, in politically sensitive industries, Chinese buyers have been quite
cautious, often restricting their purchases to stakes below the controlling interest
threshold. Similarly, Chinese investors have refrained from hostile takeover bids for U.S.
companies.
It is interesting to point out that while access to natural resources is always an
important motive for outward FDI from China, since the early 2000s more Chinese firms
1
Rhodium Group China Investment Monitor. http://rhg.com/interactive/china-investment-monitor. April 10,
2013.
2
The data from Rhodium Group estimate the value of Chinese investment into the U.S. based on publiclyknown transactions. Deals with at least $1 million in capital will be included.
6
increasingly started to use FDI to acquire foreign technologies and managerial skills.
Illustrated by a survey conducted in 2005, there were three primary motivations for
Chinese FDI, including market-seeking (56%), obtaining technology and brands (16%) and
securing resources (20%). This evidence indicates that Chinese outward FDI is rising with
an evolving and increasingly diverse set of motivations, which also explains why
acquisitions have been regarded as a more favorable business entry mode than greenfields
from the perspective of Chinese investors who consider themselves “latecomers” in the
global market.
State Destination of Chinese Investment
Compared with the Federal Government, which is obligated with the due diligence
process to address national security concerns around foreign investment, U.S. state
governments have been more welcoming towards Chinese FDI in hopes of attracting
foreign capital to help stimulate economic activities and create employment opportunities.
Rhodium Group’s China Investment Monitor shows that from 2000 to 2012, Chinese firms
invested in at least 40 out of 50 U.S. states based on a host of factors, including existing
industry clusters, the competitive strengths of specific regions and their respective efforts
to woo investment, as well as ethnic and cultural factors. On the list of state destinations for
Chinese FDI, California, Texas and New York were the top three beneficiaries (see Table 1).
Specifically, New York has attracted a large number of companies in the financial services
sector and other related high value-added services, and it has become an ideal location for
the North American headquarters of Chinese firms, while Texas, South Carolina and
Georgia have established themselves as attractive locations for Chinese manufacturers. As
for incorporation domiciles, Delaware ranks ahead as the leading target for smaller-scale
takeovers. Not surprisingly, the state with the largest number of Chinese investments and
the broadest portfolio is California, with projects including logistics, information
technology, manufacturing, modern services and retail (see Figure 3).
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Targeted Industries of Chinese FDI
By and large, Chinese deals in the U.S. appear to be making inroads across the
spectrum of commercial America rather than focusing on a few strategic targets. The
largest industry by value is oil & gas and the second largest is electrical equipment and
components. In fact, there are 11 industries where Chinese deals exceeding $200 million
have been completed, while there are 16 industry clusters in which more than $100 million
in Chinese direct investment has been recorded. Growth is also well-distributed across the
table, in manufacturing and services sectors, high-tech and low-tech, strategic areas, and
run-of-the-mill industries (see Table 2).
There are also other interesting sector patterns. First, unlike earlier FDI, most of the
growth since 2008 has occurred in manufacturing. This includes technology-sector
acquisitions of existing facilities, but also a growing number of greenfields. Secondly, as
opposed to the Japanese in the 1980s, investments in real estate and infrastructure remain
small but interest is growing quickly.
It is significant to note that amongst the various industries, Chinese FDI in critical
infrastructure networks bears considerable controversy, given these industries’
susceptibility to espionage activities. Particularly, the recent alleged exposure of Chinese
military coveted hacking operation further depletes the trust between China and the U.S.
and thereby highlights the threats coming from Chinese money in such sensitive domestic
industries as telecom. The attempt of big telecom firms like Huawei Technologies Inc.
(Huawei) to invest in the U.S. and the subsequent disputes provide vivid illustrations of this
threat, which will be examined in greater details in later parts of the paper.
Ownership and SOEs
U.S. legislators and policymakers are becoming increasingly concerned about the
fact that Chinese state-owned enterprises are playing a more significant role in Chinese
outward FDI into the U.S. The Rhodium Group has estimated that in 2012, governmentcontrolled firms were responsible for only 30% of the completed deals but accounted for
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64% of the total deal value.3 Government-controlled firms here refer to companies in which
the Chinese government holds over 20% of the shares (see Figure 4). This definition of
state-owned enterprises is provided by the Rhodium Group.
In Chinese official statistics, state-owned enterprises have been referred as either
“state-owned enterprises” or “state-owned and state-holding enterprises.” The term “stateowned enterprises” refers to enterprises established by either the central or local
government of China, including only wholly state-funded firms. This narrow definition is
primarily used to present balance sheet information, such as asset statistics of local and
central state-owned enterprises by the Chinese Ministry of Finance. However, it does not
cover the ownership forms of shareholding cooperative enterprises, joint-operation
enterprises, limited liability corporations or shareholding corporations, whose majority
shareholders are the government, public organizations or state-owned enterprises
themselves.
The more practical term “state-owned and state-holding enterprises” has been used
since the privatization reform during the mid-1990s. It refers to state-owned enterprises
plus state-holding enterprises, of which state-owned enterprises are wholly state-funded
firms as aforementioned and state-holding enterprises are those whose majority shares
belong to the government. This broad and clear definition of state-owned enterprises is
mainly used in the statistics on industrial enterprises, including China’s outward FDI.
Although more and more wholly state-owned enterprises have been listed on stock
exchanges during the privatization reform, their majority shareholdings still belong to the
government. Thus they should be classified as “state-holding enterprises.” Their parent
companies, however, are usually wholly state-funded firms and therefore, could be
classified as “state-owned enterprises.” (see Table 3)
As for the state-owned enterprise classification by the WTO, there are no special
rules. This is because the WTO is historically designed to be ownership-neutral and focus
on the rights and obligations of member states, rather than specific business enterprises. In
the Report of the Working Party on the Accession of China, the Chinese government stated
3
Rhodium Group China Investment Monitor. http://rhg.com/interactive/china-investment-monitor. April 10,
2013.
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that “China’s objective is for state-owned enterprises, including banks, to run on a
commercial basis and be responsible for their profits and losses.” This "solely commercial
consideration" principle is compatible with the goals of the WTO. As for Chinese FDI in the
U.S., issues related to state ownership will be addressed in the later parts of this paper.
2. Economic Issues
In the past two years, China contributed 15% of global GDP growth. However,
despite its rapid economic growth, China’s outward FDI lags behind, only ranking 9th
globally in 2011, according to data from the United Nations Conference on Trade and
Development (UNCTAD).
To clarify the data comparison methodology used in this paper, extensive literature
has been reviewed on U.S. inward FDI since the 1980’s and Chinese outward FDI since
2001. Official data is collected from the U.S. Bureau of Economic Analysis (BEA) and the
Statistics Bulletin of China’s Outward Foreign Direct Investment (Bulletin) co-written by
the Ministry of Commerce, National Bureau of Statistics and State Administration of
Foreign Exchange of the People’s Republic of China (P.R. China). However, for the purpose
of consistency, unofficial data from Rhodium Group has been chosen to be the benchmark
of the analysis hereafter, as it has the most up-to-date and detailed data and deal
information.
There are some data discrepancies among the various data sources due to the
different statistical rules to which the agencies refer. BEA’s FDI data is organized on the
basis of the ultimate host and ultimate investing country, which is described as “ultimate
beneficial owner” (UBO). This “balance of payments” (BOP) method is only based on data
officially reported by companies. On the other hand, the official data coming from China’s
side, or the Bulletin, counts FDI on the basis of the immediate host country and immediate
investing country, ignoring the “trans-shipping” via tax haven countries (regions), such as
Hong Kong, Cayman Islands, Bermuda, and British Virgin Islands. The disparity in counting
method notwithstanding, both the U.S. and China define FDI as investments with at least 10%
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of shareholding by foreign (Chinese) parent company, and those with less than 10% are
considered “portfolio investments” or “security investments.” (see Figure 5)
In spite of the data discrepancies, all sources suggest that the China’s FDI in the U.S.
has grown substantially since 2002, even during the global financial crisis and subsequent
recession. According to Rhodium’s data, China’s total FDI in the U.S. has reached $22.8
billion in 2012, 175 times over the $130 million in 2002. This rapid growth is primarily
driven by the Chinese government’s “go global” policy and a stronger Chinese currency.
The appreciation of the renminbi stimulates Chinese overseas investments due to 1) the
wealth effect and 2) a loss in export competitiveness that drives Chinese firms to localize
their production and sell products domestically in the U.S. However, even with such an
impressive surge, China only accounts for around 1% of the American inward FDI, and the
U.S. only accounts for 1% of the total outward FDI from China, as the U.S. is still one of the
most popular destinations for foreign investments and Chinese FDI has been more focused
on Asia. Thus there is tremendous potential for China’s FDI to grow in the U.S.
Benefits and Risks
Since the mid-1970s there has been a major transition in the role of the United
States with respect to FDI, from being primarily a home country FDI to both a home and a
host for FDI on a significant scale. The U.S. has been the premier location for new business
investment. It attracted about $225 billion in inbound investment in 2011 from global
companies headquartered abroad4. Historically, the U.S. has received about 15% of total
global outboard FDI. Much of the discussion in recent years of the economic effects of FDI
in the United States, particularly for those made by Chinese investors, has focused on the
possible risks and costs. However, it seems appropriate as a starting point to discuss the
potential benefits as this paper argues that the benefits outweigh the costs.
FDI generally increases the welfare of both producers and consumers. According to
a study by McKinsey Global Institute, FDI provides capital needed to raise investment levels,
as well as increases competition in the host country, which reduces production costs and
increases economies of scale. It also raises employment levels at no cost to the taxpayer
4
U.S. Department of Commerce data, http://selectusa.commerce.gov/why-select-usa
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and provides jobs that are typically better remunerated than similar jobs in domesticallyowned firms. In addition, it brings in new technology, processes, and skills, which help
domestic firms penetrate foreign markets and thus boost exports. All of these benefits of
FDI contribute to higher productivity and brighter prospects of long-term economic growth.
Based on the analysis on recent Chinese investments in the U.S., Chinese FDI has produced
economic benefits similar to the aforementioned, which is explained in the ensuing
paragraphs; in other words, economic benefits would be indifferent to the nationality of the
investors. Nevertheless, it’s worth noting that this argument was established under a more
qualitative rather than quantitative approach because we find relevant official statistics
still limited and incomplete.
First, direct investment is a form of international integration, and increasing
integration facilitates international trade in goods, services, and knowledge. From a
macroeconomic perspective, openness to foreign investment benefits the U.S. for the same
reasons that open trade does; it promotes comparative advantage, increases
competitiveness in both domestic and international markets and reduces production costs
and product prices. This does provide U.S. consumers with not only increased purchasing
power but also a wider selection of options. A good example is when Haier, a leading
Chinese white goods producer, invested $30 million in a refrigerator plant in Camden,
South Carolina. This investment allowed Haier to establish market presence in the U.S.
white goods sector, providing U.S. consumers lower prices and more innovative products.
Haier is now the world’s largest white goods producer and exports its high-end
refrigerators made in the U.S. to China and other markets. This also illuminates that inward
Chinese FDI could serve as an economic tool to reduce the U.S. trade deficit with China in
the medium to long-run.
Second, FDI generates spillover efficiency gains for the U.S. economy. These benefits
take place when domestic firms imitate innovations introduced by foreign affiliates.
Japanese investments in U.S. color television and automobiles sectors well illustrate this
concept. During the 1980s, Matsushita Electric’s acquisition of a Motorola Inc. factory and
Honda Motors’ entrance into the U.S. transferred superior technology and management
techniques to the U.S. market, raising industry-wide productivity. Chinese firms that have
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developed stronger manufacturing capabilities than their U.S. rivals can also produce such
positive spillover gains to the U.S. A good example is Lenovo’s acquisition of IBM’s
underperforming personal computer business, which has promoted greater competition
and industry-wide production efficiency in the U.S. PC sector. It is important to recognize
that any spillover benefits to domestic firms will depend on local firms’ absorptive capacity.
In the case of Chinese FDI in the U.S., the issue of absorption will likely depend more on
cultural at the organizational level than on the capability of U.S. companies to adopt and
exploit technology spillovers.
Third, inward FDI brings in fresh capital and generates employment. Capital
investment is injected into the domestic economy in the form of either greenfields or
acquisitions. As projected by Rhodium Group, by 2020, more than $1 trillion of FDI will
flow from China into the global economy. If we assume that the U.S. maintains its historic
average intake of global FDI flows at 15%, then the U.S. should expect a cumulative of $150
billion in inward FDI. As for employment, by year-end 2010, the most recent year of
available detailed data, foreign firms employed almost 6 million Americans, less than 4% of
the U.S. civilian labor force and owned over 33,000 individual business establishments.
Employment associated with foreign investors varies by sector. According to BEA’s data, 55%
of employment was generated by foreign firms from three broad sectors: manufacturing,
retail and wholesale, and information, finance and real estate. By year-end 2010, majorityowned U.S. affiliates of Chinese firms employed about 11,200 people in the U.S.,5 as
compared to the 654,900 American jobs created by majority-owned U.S. affiliates of
Japanese firms. This figure, in relation, is still small but has tremendous growth potential.
Fourth, inward FDI benefits domestic asset owners through foreign investors’
participation in the bidding of asset sales. If foreign investors believe they can operate
acquired assets more efficiently, they tend to pay higher prices for those assets than local
investors. Chinese investors’ participation in deals usually raises bidding prices as they
tend to pay premiums in order to acquire existing companies with established market
5
Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies,
Preliminary
5
2010 Estimates. Bureau of Economic Analysis, September 2012, Table 1A-1.
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access, advanced technologies or recognized brands. CNOOC’s failed acquisition of Unocal
in 2005 is a prime example. Unocal attracted an acquisition bid of $18.5 billion from
CNOOC, compared to an initial bid of $16.5 billion from Chevron. Although CNOOC’s
proposed offer was withdrawn given U.S. political pushback, the final winning bid by
Chevron amounted to $17.1 billion, thus ultimately benefiting Unocal’s shareholders. In
many cases, Chinese investors are willing to “overpay” for acquisition investments mainly
because they are confident in exploring mass and untapped markets at home based on
strategic assets acquired from the U.S.
Last but not least, inward FDI can serve other U.S. economic and strategic interests
in facing China’s rise. By welcoming Chinese investments, the U.S. would encourage China
to keep its doors open to American investments. As argued by Ambassador Shaun E.
Donnelly, “China has come an incredibly long way in its investment policies, as in so many
other areas, over the past 30 years…but China has not yet established an open, marketbased investment regime. Far from it. Screenings, controls, restrictions, informal pressures,
forced localization, and political interventions unfortunately remain central to the Chinese
investment system.” To continually drive forward Chinese convergence with liberal
international economic order depends on America’s continuing demonstration of the
virtues of openness. Take the potential bilateral investment treaty (BIT) as an example.
Both governments recognize its important role in improving bilateral economic relations
and have begun cabinet-level negotiations since 2008. There is no doubt that ongoing
discussion requires America’s continuing open and welcome attitude towards inward FDI
from China. Furthermore, increasing Chinese investments can enhance Chinese investors’
compliance with global business norms when an increasing number of Chinese companies
are exposed to U.S. or western standards of corporate governance, public reporting, and
acquisition financing. One of the three principles of the Obama administration’s China
policy is that “while welcoming China’s rise…it is essential that this occurs within the
context of international law and norms.” Having inward FDI from China can be an effective
means that forces Chinese investors, particularly Chinese state-owned investors, to abide
by U.S. rules and institutions.
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Nevertheless, there have been many concerns against inward FDI by Chinese
investors in the U.S. Questions are raised about the governance of Chinese firms and the
fear towards Chinese state-owned companies. In China, most firms with the capital,
expertise and ability to invest abroad are generally at least partially government-owned.
Often the legal structures of these companies are so complex and convoluted through
numerous subsidiaries and holding companies that even if they label themselves as
“private,” they can still have significant government ownership. Then, it becomes a problem
if these firms enjoy cheap cost-financing considering that the majority of their funding
comes from a state-associated source (i.e. all “Big Five” banks in China are state-owned).
These lead to concerns that Chinese affiliates in the U.S. may cause unfair competition and
market distortion that undermine America’s market-oriented economy.
In addition to that, the ability of Chinese firms to manage their overseas affiliates
successfully is put into question. Although Chinese investors have become very active in
acquisitions in the natural resources sector over the past decade, they still lack sufficient
track records on operating overseas manufacturing, technology and service businesses, the
three sectors in which the Chinese are actively looking to invest in the U.S. Lessons drawn
from historical inward FDI in the U.S. highlight some of the highly publicized takeovers of
American firms by Japanese companies during the 1980’s, which resulted in the Japanese
entering new lines of business in which they had little expertise or experience. However,
some of these acquisitions quickly soured.
More importantly, there is growing suspicion that acquisitions initiated by Chinese
state-owned companies are not driven by commercial interests alone, but are rather the
result of political or strategic direction determined, or at least influenced, by the
government. Although the State-Owned Assets Supervision and Administration
Commission (SASAC) is not allowed to intervene directly in the management or day-to-day
operations of companies, it has the authority to appoint directors, managers and
supervisors of wholly state-owned enterprises and to nominate directors and supervisors
of partially state-owned enterprises. Moreover, while state-owned company executives are
rewarded based on financial performance, the future career paths of top executives upon
leaving the firm are determined by the ruling Communist Party, which gives incentives to
15
those executives to follow the government's policy guidance. Even for the privately-owned
companies, the government is still a significant concern for them in terms of market
development, regulation lobbying, funding from government-controlled banks, and so on.
More issues with respect to inward FDI made by Chinese state-owned companies are
further discussed in the national security concerns section of the paper.
Another major concern towards Chinese FDI is the fear that Chinese investors will
take proprietary technology out of the U.S. and relocate R&D activities near their
headquarters at home, thereby reducing the quality of employment in the U.S. China’s
weakness as an innovation house, among the three main motivations for outward FDI, has
driven Chinese firms to acquire advanced technologies abroad. This concern was primarily
triggered by a national government policy in 2006 that stated “China should implement
and promote government procurement for indigenous innovation products.”6 Despite the
fact that the central government recently followed the commitment made during the 2011
US-China Strategic and Economic Dialogue (S&ED) and pushed to delink indigenous
innovation and government procurement, “85% of companies surveyed said they had seen
no positive change in sales opportunities to the Chinese government, implying that the
delink effort on paper has yet to translate into real change.”7 This leads to an incentive for
Chinese firms to shift technologies and other R&D activities abroad to China. More broadly,
it could also change the quality of employment in an unfavorable way in the U.S., reducing
the number of “good jobs” and replacing them with “bad jobs.” Our analysis, however, does
not support this concern as a downside example of Chinese firms acquiring U.S. assets to
extract technology and shut down local operations. Moreover, there is no evidence that
Chinese firms are more likely to do so than other foreign multinational corporations. In
contrast, data from BEA indicates that research and development performed by Chinese
affiliates in the U.S. soared 123% from $26 million in 2009 to $58 million in 2010.8
6
Medium- and Long-Term National Plan for Science and Technology Development (2006)
http://www.gov.cn/jrzg/2006-02/09/content_183787.htm
7
The US-China Business Council Status Report: China’s Innovation and Government Procurement Policies,
2013
8
Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies,
Preliminary
8
2010 Estimates. Bureau of Economic Analysis, September 2012, Table 13.1 and 13.2.
16
Japanese FDI in the U.S. in 80s’ vs. Chinese FDI in the U.S.
To better illustrate the issues related to Chinese FDI in the U.S. from an economic
perspective, it is worth mentioning the case of Japan’s investments in the 1980s, the decade
marking the high point of Japanese FDI in the U.S. The environment of the U.S. as a host
country to China’s FDI today draws striking parallels to that of the Japan’s overseas
expansion.
With Japan’s economic ascendance in late 1970s, its FDI flow into the U.S.
skyrocketed from less than $1 billion annually in the early 1980s to a peak of over $18
billion in 1990 alone. On percentage terms, Japanese FDI went up from 6.2% to 20.7% of
the total stock value of foreign investments in the U.S. within ten years. China’s FDI is
taking place against a backdrop that bears a striking resemblance to Japan’s experience.
From just $14 million in 2000 to $6.5 billion in 2012, Chinese FDI in the U.S. has
experienced a dramatic increase of 460% in the past decade.
Chinese firms looking to invest in the U.S. share many of the same motivations as
their Japanese counterparts. First, their initial investments were an extension of their
international trade initiatives. To internalize and reduce organizational and transactional
costs, foreign investment was needed to support and expand the position of the companies
in the host country. Thus, in the 1960s and 1970s, Japanese investment was predominated
by FDI related to trade activities. Second, on macroeconomic terms, depreciation of the U.S.
dollar against the Japanese yen led to increased FDI from Japan, particularly in the form of
acquisitions. The effect was strongest in industries with more tangible assets, such as
manufacturing, particularly in high-tech products. Additionally, massive asset inflation in
real estate and equities due to the speculative bubble economy also contributed to the
surge of Japanese FDI in the latter half of the 1980s. Another macroeconomic factor was the
bilateral trade imbalance, which has appeared in both cases. Since FDI can be seen as a
complement to international trade, as Japanese exports to the U.S. grew, FDI also expanded.
Common traits can also be found in the investment trajectory and mode of entry for
the two countries’ outward FDI to the U.S.. In the first half of the 1980s, greenfield
investments and M&A were roughly the same size in terms of volume. However, with the
dollar’s depreciation and Japanese asset inflation, cumulative expenditures were heavily
17
directed toward M&A. Similarly, all seven of the Chinese FDI deals executed in 2000 were
in the form of greenfield projects, while 24 out of the 62 deals completed in 2012 focused
on acquisitions. In addition, in terms of location decisions, California has been the
overwhelming choice for firms from both countries, a decision driven by production factors
and state-level government incentives.
Even though Japan had stronger institutional ties to the U.S. during the 1980s and
1990s as a fellow democratic state, there remained salient economic frictions and
controversies resulting from the issue of inward FDI into the U.S., which has been escalated
between the U.S. and China. First, trade imbalances have been and will continue to be
perceived by the U.S. government as an issue from which the domestic economy should be
protected. Similar complaints are raised about unfair Chinese trade practices, such as
dumping and poor intellectual property protection, as well as “subsidies” from the Chinese
government. Second, FDI involves the issue of employment practices. By the end of the
1980s, about 300,0009 Americans worked for Japanese affiliates in the United States. In
contrast, by the end of 2012, Chinese firms only employed 29,00010 people. Employmentrelated disputes were a constant source of concern for Japanese firms and Americans were
less willing to work for Japanese firms than other foreign companies. Even though there is
insufficient literature on Chinese employment practices, the continued sensitivity around
the issue is still a concern for policymakers.
Along with the surge in Japanese direct investment in the United States, there was
widespread American suspicion at the beginning of the 1990s that the Japanese intended to
take over the U.S. business community. Especially during 1988-1990 when Japanese
investments were booming, 12 large acquisitions raised apprehension of Japan’s “buying of
America,” but they ignored the fact that 33 other megadeals completed in that period
involved non-Japanese companies. This was mainly because of U.S. perception at the time
that Japan was the only real competitive threat to the future health of the U.S. economy.
Two decades later, public discourse in the United States is filled with references to the
9
Jim Schachter and Nancy Yoshida, “U.S. workers tested: bosses from Japan bring alien habits,” Los Angeles
Times, July 19, 1988
10
http://usa.chinadaily.com.cn/business/2013-01/01/content_16073615.htm
18
“threat” posed by China’s economic emergence. A Congressional Research Service Report
noted: “in many respects, the rise of China as a global economic power is subject to the
same interpretation as the economic rise of Japan during the 1970s and 1980s and the
impact that rise was thought to have on the U.S. economy.”11
Despite the parallels between the two cases, there are important differences to note,
principally stemming from China’s political orientation and its geostrategic position against
the United States. Meanwhile, the prevalence of Chinese state-owned enterprises in global
FDI is regarded as a significant issue to be considered in comparison with Japanese
privately-owned companies.
3. Political Issues
On the topic of political issues, this paper discusses a number of concerns including
the over-politicizing of Chinese FDI in the U.S., the potential for political distortion through
the acceptance of increasing amounts of Chinese investments and the importance of nonpolitical advocates of the U.S.-China relationship. This paper also examined other advanced
economies such as Australia and Canada with sizable Chinese FDI inflow and have not
identified major political issues in the two countries caused by increasing Chinese
investments.
The U.S. and China have historically been strategic competitors but increasingly as
partners. Over the past 30 years since China’s opening to the world economy, both
countries have gradually recognized the importance of building a strategic relationship
based on common interests, mutual trust and long-term gains. However, given the
countries relatively lack of understanding for each other’s interests, intentions and culture,
this has resulted in significant pushback on Chinese investments in the U.S., particularly
FDI into key industries such as oil and gas, energy and technology. Therefore there are
many political considerations that must be assessed in order to evaluate the future success
of not only deals but also Chinese investments in the U.S. as a whole.
11Craig
K. Elwell and Marc Labonte, “Is China a Threat to the U.S. Economy?” January 23, 2007
19
One aspect of the political consideration is the existence of political distortion. As of
Q1 2013, no such incidents have been identified given the small size of inward FDI stock in
the U.S. made by Chinese investors. However, considering ongoing strategic confrontation
between the U.S. and China and the competitive relationship, related interest groups may
potentially affect U.S. norms in economic policymaking and political decision making. For
example, within Congress, representatives from states with more economic ties with China
tend to adopt a relatively pro-China stance whereas representatives with links to security
issues tend to cast anti-China votes.
Another significant issue is whether the current U.S. political and regulatory
framework is ready to receive more M&A and greenfield investments from China. There are
a number of U.S. institutional actors who have a vested interest towards inward FDI. These
stakeholders include Congress and state and local governments, as well as other interest
groups including labor organizations, lobbyists, competing firms and other third party
constituents.
Specifically, Congress can take action to either support or oppose a foreign
investment, particularly those from Chinese companies seeking access to critical industries
or technology. Other major players with decision-making power include the Department of
Commerce and the Committee on Foreign Investment in the United States (CFIUS). Over the
past few years, U.S. policymakers have increased their scrutiny over Chinese investments,
intensifying the political debate and popular rhetoric on attacking Chinese practices. For
example, the Senate Committee on Finance disapproves of China’s unfair practices, lack of
enforcement of trade agreements and increased tariff and import quotas on U.S. goods. In
addition, two members of the U.S. House Intelligence Committee not only criticized two of
the largest Chinese telecommunications firms (see National Security Concerns)12 but also
increased lawmaker and lobbyist efforts to obstruct a series of M&As in the technology
12
Schmidt, Michael, Keith Bradsher and Christine Hauser. “U.S.Panel Cites Risks in Chinese Equipment.” New
York Times. October 8, 2012. Accessed April 10, 2013: http://www.nytimes.com/2012/10/09/us/us-panelcalls-huawei-and-zte-national-security-threat.html?pagewanted=all&_r=0
20
sector, including Wanxiang Group’s bid for A123 Systems and BGI Shenzhen’s bid for
Complete Genomics13.
Outspoken anti-China members of Congress and lobbyists often use their political
clout to influence policymakers, specifically in highlighting unfair practices and potential
national security threats, in order to push for a “nay” in the voting process for inward FDI
from Chinese firms. This is clearly demonstrated in the CFIUS process.
On the other hand, Chinese investments have been generally welcome at the state
level. According to an informal discussion with the Consulate General of China in New York
City14, the general sentiment is that states (governors) are much more willing to invite
Chinese delegations and accept proposals for investments than at the national level. This is
because states have specific interests and are trying to attract more investment into
strategic industries such as manufacturing, energy and oil and gas, by offering business and
tax incentives.
In addition, another source of political mistrust is China’s relationship with the WTO.
Often, China is accused of not respecting the rules of the WTO with regard to lack of
transparency, poor governance and lack of reciprocity –- both the U.S. and China have to
adhere to international standards and practices in order to move forward with discussions.
Former President of the World Bank, Robert Zoellick encourages the countries to move
towards the completion of an international services agreement that offers reciprocal
liberalization and improving the services trade.
Given the amount of China-bashing and political rhetoric, Chinese FDI in the United
States has become a political pawn. Thus, the Sino-U.S. relationship must be further
assessed with a de-politicized lens. This highlights important political implications for the
future of the rapport, in defining mutual foreign and trade policy and commercial interests.
Specifically, the U.S. should create a platform for discourse and action as well as a stable
investment environment where Chinese investors can be treated similar to other foreign
investors and gradually become legitimate stakeholders in Congress.
13
Gelles, David. “US approves $18 bn CNOOC Bid for Nexen.” Financial Times. February 12, 2013. Accessed
February 13, 2013: http://www.ft.com/intl/cms/s/0/2cc88ec2-7529-11e2-8bc700144feabdc0.html#axzz2SOFHPGjm
14 Consul preferred not to be cited for this discussion.
21
Chinese FDI in the U.S. vs. in Canada and Australia
Although FDI serves as an important tool in building local economic capacity,
governments and people of host countries can be apprehensive of foreign ownership of a
significant share of domestic economic activities. Host country political and national
security concerns with material effects on foreign investment also exist in other developed
countries like Australia and Canada.
Canada
China has taken a genuine interest in its investments into Canada. Chinese
companies rank Canada sixth out of ten likely destinations for Chinese overseas FDI and
first in terms of perceived openness to Chinese FDI. Chinese investors also view Canada as
a gateway to the U.S. market and consider energy, natural resources and agriculture as
promising sectors for investment. Chinese FDI in Canada hit an all-time high in 2012, with
most of the funds going into purchases of natural resource companies and projects.
There are two significant factors related to Chinese investment in Canada. One
surrounds the underlying corporate governance of Chinese state-owned enterprises under
a centralized Communist government, while the other is the obvious focus on resource
investments. Notably, similar to China’s outward FDI into the U.S., China’s governmentcontrolled entities tend to conduct fewer but considerably larger investments than private
or public companies, with many deals in natural resources. This spurs legitimate national
concerns about Chinese FDI in sensitive industries. Additionally, political concerns begin
with the inherent distrust of the Chinese political system, a non-democratic Communist
authoritarian regime for over seven decades. In February 2012, Harris Decima polled
Canadians on their attitudes toward Chinese investments. Only 10% of respondents
favored Chinese companies taking a majority controlling interest or acquiring Canadianowned operations.
Currently, Canada regulates foreign direct investment through the Investment
Canada Act. Under this Act, foreign investments of a certain size and nature must first be
deemed by the government to be "of net benefit to Canada." There is a separate review
process that can be invoked to determine if a foreign investment could be "injurious" to
22
national security. However, the opaque and politicized nature of Canada's foreign
investment review process is often castigated.
The recent CNOOC-Nexen transaction clearly put the Canadian government in the
spotlight. Recognizing the value of Chinese investments in Canada, the government had
completed the Canada-China Foreign Investment Promotion and Protection Act (FIPPA),
Canada's biggest foreign trade treaty since NAFTA, which came into effect at the end of
October 2012. FIPPA bound both federal and provincial-level governments to its clauses in
promoting fair and open trade with China for the next 31 years until 2043.
Australia
Australia has been among the top reported recipients of Chinese FDI in recent years.
During the fiscal year 2010-2011, Chinese applications of investments totaling A$15
billion15 were approved by the Australian government, with the third highest number of
approvals, behind the U.S. and U.K. As Australia has historically been dependent on foreign
capital to develop its natural resources sector, Chinese investments have been focused on
mineral exploration and resources processing, different from that in the U.S.
Despite the positive impact of foreign capital flow and relatively open policy
towards inward FDI in the energy and natural resources sectors, the Australian
government has been reluctant to accept foreign ownership, especially after the late 1970s
when Japan became a major importer of resources and energy from Australia. Prior
negative perceptions of Japanese investors have manifested again amongst the Australian
public in their reactions toward Chinese investors. In 2008, for example, the annual Lowy
Poll revealed that 78% of respondents were either “strongly opposed” or “opposed” to the
idea of Chinese state-owned enterprise investment. 16 These perceptions of foreign
ownership are a natural consequence of nationalism, and this has been exacerbated by a
lack of understanding of the institutional environment within which China’s state-owned
15
Hurst, Luke and Peter Yuan Cai, “Chinese Direct Investment in Australia: Public Reaction, Policy Response,
Investor Adaption.” East Asian Bureau of Economic Research. Working Paper Series, No. 81. December 2012.
16 Shearer, Andrew. “Sweet and Sour: Australian Public Attitudes Towards China.” Lowy Institute for
International Policy. August 2010:
http://www.lowyinstitute.org/files/pubfiles/Shearer,_Sweet_and_sour_web.pdf
23
investors operate and the actual scale of investment. One example is the lack of reliable
data on Chinese outward FDI into Australia, as the government is unable to provide
detailed information on the extent of Chinese ownership. For instance, there are significant
discrepancies between the three publicly available databases estimating Chinese FDI into
Australia: The Heritage Foundation’s China Investment Tracker data, International
Monetary Fund’s Coordinated Direct Investment Survey, and official Chinese Ministry of
commerce data.
An earlier response to growing public concern over FDI was the establishment of
Foreign Investment Review Board (FIRB) in 1976, which operates similarly to CFIUS.
However, the FIRB exhibits a higher level of scrutiny over FDI from China. With regard to
investments from state-owned enterprises and sovereign wealth funds, a further degree of
“protection,” as well as the extraterritorial nature of FIRB’s approval requirements are
applied. Public pressure can also complicate the FIRB review process through demanding
adjustments to the rules or application of policy which may discriminate against certain
investors. One case is the Australian government’s response to Chinese FDI in the real
estate sector. The previously relatively open policy was amended after astonishing media
coverage and negative sentiment towards Chinese investments, an incident which had
underlying political implications during the presidential elections. One notable change in
Australia’s policy responses toward Chinese investment is the recent erosion of bipartisan
support for foreign investment.
In reaction to the negative public sentiment and policy responses, Chinese investors
have dedicated their time and efforts towards adapting to local customs and rules. There is
considerable evidence that state-owned enterprises have been actively pursuing strategies
that are more in line with market forces, rather than government policies. First, the
corporate governance of China’s state-owned enterprises is increasingly driven by market
disciplines, and further reform is expected. In April of 2012, SASAC announced a new
guideline that demanded a higher degree of due diligence and risk management on all
overseas projects of state-owned enterprises. Additionally, Chinese firms are adjusting
their entry strategies to attain regulatory and institutional legitimacy and trying to
establish a more positive image and reputation in their host countries. They continue to
24
aim to decrease the risk of public backlash and adverse policy responses in Australia.
Second, Chinese companies are learning from past failures and understanding the
importance of a strategic public relations campaign. They are now engaging prominent
local and state-level board members and increasing local marketing activities. There are
several cases of this strategy, specifically in the agriculture and minerals sectors.
4. National Security Concerns
Besides economic and political considerations, security issues constitute the
majority of the concerns regarding Chinese FDI in the U.S. Although according to research,
while foreign firms operating in the U.S. are subject to U.S. laws, the perception is that
American-owned and controlled companies are more likely to abide by provisions of U.S.
laws, regulations, and policies. This is especially the case when foreign acquirers are
subject to the control or influence of their governments whose intentions may be hostile to
the U.S. and when targeted industries or sectors are critical for national security. Under
most circumstances, the need to examine foreign acquisitions is apparent. For instance, in
the defense sector, the Department of Defense has utilized numerous tools to ensure that
only U.S. citizens are hired as contractors to perform classified work. However, in most
sectors of the U.S. economy, the nationality of the equity owners of a global firm makes no
difference from a national security perspective. Since this openness is one of the crucial
strengthens of the U.S. economy, it is a challenge for FDI regulations to ensure an open
economy while properly addressing potential national security threats.
From a national security perspective, the risk of foreign acquisition of dual-use
technologies, as well as access or control of important domestic assets are considered to be
immediate national security threats. This perception has intensified since the September
11th terrorist attacks. In the USA PATRIOT Act of 2011 (Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism), Congress
provided a definition of “critical infrastructure,” which was newly defined as domestic
25
assets to be protected from foreign entities.17 Later, the Department of Homeland Security
became responsible for identifying critical infrastructure and subsequently, 16 critical
infrastructure sectors were listed in the Presidential Policy Directive 21.18 The emergence
of the concept of critical infrastructure has changed the general perception of the dangers
that FDI could impose on national security. For example, in the 9/11 Commission Report,
the commission clearly stated the importance of electronic surveillance and intelligence
collection to protect the U.S. from future terrorist attacks. Telecommunications, which is
part of the information technology sector, was officially identified as a critical
infrastructure sector. Consequently, intelligence and law enforcement agencies, which
were already concerned about the implications of foreign ownership and control over
telecommunications facilities, became even more cautious in examining proposed M&A
deals in the telecommunications sector.19 This was due to the fact that authorities wanted
to ensure that foreign ownership of telecommunications assets would not become a
conduit for surveillance or deprivation of dual-use technologies to benefit foreign
governments.
China’s Cyber Espionage
China’s intentions to acquire dual-use technologies have roused imminent concerns
and suspicion from the U.S. Historically, since China’s exposure to the superior
performance of U.S. military technology during the Gulf War, China has sought to achieve a
modernized national defense industry. In China’s National Defense in 2008 issued by the
Information Office of the State Council, China’s strong motivations toward the acquisition
of dual-use technology in order to rival U.S. capabilities by the mid-21st century were
apparent. Also, the Department of Defense recognizes that China has “modernized its
17
In the act, critical infrastructure was defined as “systems and assets, whether physical or virtual, so vital to
the United States that the incapability or destruction of such systems and assets would have a debilitating
impact on security, national economic security, national public health or safety, or any combination of those
matters”
18
The sectors include 1) Chemical; 2) Commercial Facilities; 3) Communications; 4) Critical Manufacturing; 5)
Dams; 6) Defense Industrial Base; 7) Emergency Services; 8) Energy; 9) Financial Services; 10) Food and
Agriculture; 11) Government Facilities; 12) Healthcare and Public Health; 13) Information Technology; 14)
Nuclear Reactors, Materials, and Waste; 15) Transportation Systems; 16) Water and Wastewater Systems.
19
Larson Alan P. and Marchick David M., “Foreign Investment and National Security – Getting the Balance
Right,” Council on Foreign Relations, CSR no.18 July 2006
26
military by incorporating Western (mostly U.S.) dual-use technologies” in its annual report
to Congress.20 The acquisition of these foreign technologies enables China to bypass years
of expensive research and development to close the technological gap with the U.S., and
China has made tremendous efforts to import these technologies either legally or through
illegal means.21
In fact, an inestimable amount of cyber-attacks originate in China every year and
Chinese websites host nearly ten times more malicious software than the world average. 22
Although it is difficult to attribute these cyber-attacks to the Chinese central government,
provincial governments and civilian entities, the U.S. intelligence community has traced
Chinese cyber-attacks to a large network of cyber actors, which mainly consists of central
government entities. These entities often collaborate with the Chinese telecommunications
sector to draw valuable expertise from the U.S. government and firms. Among U.S.
intelligence agencies, it is widely believed that large Chinese telecommunications firms
such as Huawei have strong ties to the Chinese government and military and poses national
security risks.23 In October 2012, the U.S. House Intelligence Committee identified two
giant telecommunication companies, Huawei and ZTE Inc. (ZTE), claiming that both firms
have posed national security risks to the U.S. The Committee stated in its report that “the
United States should view with suspicion the continued penetration of the U.S.
telecommunications market by Chinese telecommunications companies.” Although
representatives of Huawei and ZTE claimed that the report’s concern was “baseless” and
that acquisition of dual-use technology “wouldn’t be their business interests,” the report
emphasized that the firms either failed or refused to address the Committee’s doubts.24
20
Office of the Secretary of Defense, “Military and Security Developments Involving the People’s Republic of
China 2012,” The Department of Defense, Chap 2.
21
Ibid.
22
U.S.-China Economic and Security Review Commission, “2012 Report to Congress,” U.S. Government printing
Office, 2012. 152
23
“Chinese telecom firm tied to spy ministry,” The Washington Times,
http://www.washingtontimes.com/news/2011/oct/11/chinese-telecom-firm-tied-to-spyministry/?page=all, Accessed April 21, 2013.
24
“China Tech Giant Under Fire,” The Wall Street Journal,
http://online.wsj.com/article/SB10000872396390443615804578041931689859530.html, Accessed April
21, 2013.
27
Given the current status of Chinese industrial espionage in the cyber domain, the U.S.
government is taking all necessary steps to understand the risks posed by Chinese entities,
not only in the telecommunications sector but also other critical infrastructure sectors. For
instance, the U.S. government also has national security interests in preserving the integrity
of global energy markets where China has strategic interests. Although it is believed, in the
case of a real national emergency, that the government can expropriate foreign-owned
resources or other assets critical to national defense, but it still needs to regulate foreign
access to or control of these resources and assets even in peacetime so critical information
and technologies will be protected.
In order to defend its national security interests, the U.S. should maintain a balance
between the restriction of FDI and providing an open investment climate. Needless to say,
the U.S. is one of the most unrestricted economies to foreigners, and according to the FDI
regulatory restrictiveness index, the U.S. has relatively open FDI regulations compared to
other global economies.25 Nevertheless, if the U.S. sends the wrong signals through FDI
regulatory operations, foreign investors may decide that the risks are too great to invest in
some sectors in the U.S. In order to preserve the openness and attractiveness of U.S.
markets, the government should promote a FDI review mechanism that can accurately and
fairly identify investments that are a real threat to U.S. national security, while not
discouraging transactions that are non-threatening.
FDI Review Mechanism
CFIUS is an inter-agency committee tasked with identifying and addressing national
security risks posed by “mergers, acquisitions, or takeovers of U.S. businesses” initiated by
foreign entities. The core mandate of CFIUS was stipulated by the Exon-Florio Amendment
to the Defense Production Act in 1988, which came into effect as a result of major
controversy over a Japanese firm’s attempt to acquire a U.S. semiconductor firm. In 2007,
as a result of shifting national security prospects after the 9/11 terrorist attacks and
controversial attempts by foreign entities to acquire critical infrastructure, such as Dubai
25
Organization for Economic Co-operation and Development, “FDI Regulatory Restrictiveness Index,”
http://www.oecd.org/investment/fdiindex.htm, Accessed April 21, 2013.
28
Port World’s efforts to acquire British-owned P&O Ports, the Foreign Investment and
National Security Act of 2007 (FINSA) was passed. FINSA then made a number of major
enhancements including increasing Congressional oversight capabilities toward CFIUS,
explicitly stipulating the areas of homeland security and critical infrastructure as
components of national security, and expanding the membership of CFIUS. Currently,
CFIUS consists of nine members, five observers and two non-voting, ex-officio members,
chaired by the Secretary of Treasury.
The CFIUS national security review process consists of four main steps: voluntary
notice, review, investigation and Presidential decision. The formal review process begins
when participating entities file their transaction with CFIUS on a voluntary basis. Although
filing is voluntary, transacting parties should seek legal advice on whether CFIUS approval
is required as part of the deal closing, in case there are national security implications. The
apparent lack of CFIUS objections does not necessarily mean that deals will not be
considered potentially hazardous to U.S. national security. If parties do not voluntarily file
their transactions, CFIUS may perceive this as an unwillingness to cooperate during the
review process. Thus, the ultimate goal of transacting parties is to either get their
transactions cleared or receive the “safe harbor” provision from CFIUS, which prevents the
government from later overturning the transaction or requiring a divestiture.
During the initial 30-day review period, CFIUS has to determine whether to clear the
transaction or initiate an investigation based on its perception of the national security risks
of the transaction. FINSA stipulated that CFIUS must proceed to the investigation stage if
the covered transaction involves a foreign government-controlled entity or critical
infrastructure sectors. Although mandatory investigation is a strong clause for the
protection of national security interests, if it is determined that the transaction will not
damage national security, no investigation is required. Next, if CFIUS requires more time to
come to a decision, it will recommend parties to withdraw the transaction and re-file in
order for it to have an extra 30 days to review.
CFIUS then has a 45-day investigation period to further examine the transaction
before it makes a recommendation to the President, who is the ultimate decision-maker.
Since CFIUS has the authority to enter into a mitigation agreement with the parties
29
throughout the review process, there are possibilities for covered transactions to be
cleared even at this stage.
At the final stage of the review process, the President has 15 days to make a decision.
Many parties, which recognize the possibility that the President might block the
transaction, will abandon or restructure the deal in order to avoid a negative outcome.
There are only two cases that have had a Presidential determination: the sale of MAMCO
(Manufacturing Co.) to China National Aero-Technology Import & Export Co. in 1990 and
the sale of Terna Energy USA Holdings Co. (Terna) to Ralls Co. (Ralls), which is also
controlled by a Chinese board, in 2012.
Due to the amendments made by FINSA in 2007, the CFIUS review process has
handled and scrutinized over more covered transactions. For example, the CFIUS 2012
Annual Report shows that the percentage of transactions that have entered the
investigation stage with respect to the total number of filed transactions has significantly
increased. Before the enactment of FINSA, only about 4.5% of filed transactions were
investigated. However, after FINSA, the percentage increased to 14.8% in 2008. In 2011, an
overwhelming 40 out of 111 filed transactions proceeded to the investigation stage.26
The CFIUS annual report also stated that the number of covered transactions from
China has increased, ranking third after the U.K. and France in 2011. Since 2007, China has
exceeded Australia, Canada, Israel, Japan, the Netherlands, Russia and the UAE, countries
that had more covered transactions than China prior to the implementation of FINSA, in
terms of the number of covered transactions. However, when it comes to the value of
outward FDI to the U.S., China only exceeds Russia among these countries in 2011.27 Thus,
despite the relatively small scale of FDI inflow into the U.S., China has experienced more
scrutiny from CFIUS. In fact, the Chinese Ministry of Commerce has repeatedly claimed that
the U.S. government is using the CFIUS review process as a pretext for inhibiting Chinese
investments. From the perspective of the Chinese government and investors, the U.S. has
26
Committee on Foreign Investment in the United States. “Annual Report to Congress 2012,” (CFIUS report),
The Department of Treasury, http://www.treasury.gov/resource-center/international/foreigninvestment/Documents/2012%20CFIUS%20Annual%20Report%20PUBLIC.pdf, Accessed April 21, 2013.
27
Bureau of Economic Analysis, “Foreign Direct Investment in the U.S.: Balance of Payments and Direct
Investment Position Data,” The Department of Commerce, http://www.bea.gov/international/di1fdibal.htm,
Accessed April 21, 2013.
30
instituted protectionist policies against Chinese firms. At the same time, the fact that
Chinese state-owned enterprises comprise the majority of inward FDI and have made
considerable investments in critical infrastructure could explain why China has nearly 10%
of all covered transactions. Therefore, there is no definitive evidence that CFIUS has
utilized the review process as a tool for dampening Chinese investment.
In addition to the above, the annual report indicated that there is no clear sign of
improvement in foreign investors’ understanding of the review process. For example, the
percentage of withdrawn notices during the review process, including both abandoned and
re-filed transactions, has been inconsistent since 2007.28 This suggests that the review
mechanism is designed based on a U.S. regulator’s perspective, rather than focusing on that
of a foreign investor. This is a key finding due to the fact that excessive focus on ensuring
U.S. national security may result in an imbalance between security and an open economy.
Prior and Current Practices
In order to judge the effectiveness of the current review process, it would be helpful
to examine previous cases of Chinese investment in the United States. The three cases that
will be reviewed are CNOOC-Unocal, Huawei-3Com and Ralls-Terna. The analysis of each
case will help policymakers improve the review process of CFIUS.
CNOOC-Unocal: In June 2005, China National Offshore Oil Corporation (CNOOC)
offered to buy California-based energy company Unocal for $18.5 billion. The bid resulted
in heated political debate among Washington lawmakers, mainly because of CNOOC’s
ownership structure and financial status. CNOOC is one of the largest oil companies in
China and is 70% owned by a government-controlled company. In addition, the offer was
supported by generous loans from state-owned companies and banks. 29 The U.S.
government was not only concerned about CNOOC’s significant government shareholding
and its potential control over American oil and natural gas resources, but also afraid of the
potential proliferation of sensitive dual-use technologies employed in the oil industry for
exploration, production, and refining. As a result of tremendous pressure from Washington,
28
CFIUS report
Nanto Dick K. et al., “China and the CNOOC bid for Unocal: Issues for Congress,”
http://www.policyarchive.org/handle/10207/bitstreams/2571.pdf, Accessed April 21, 2013.
29
31
including the passage of a law prohibiting the Department of Treasury from spending
money to approve the sale of Unocal, CNOOC withdrew its filing without undergoing a
substantial CFIUS review process. A spokesperson for CNOOC commented that they made
the decision to withdraw because of mounting opposition from Washington.
In fact, considering that Unocal’s assets were limited in that it was only the ninthlargest oil company and had no refineries, the company was considered a relatively minor
player in the global oil and gas sectors.30 This realization led to questions about whether
Unocal should have been deemed a strategic asset for the U.S. If the deal had been
completed, “CNOOC-Unocal’s natural gas production combined would have amounted to
about 1% of U.S. consumption, and combined oil production would have been equivalent to
about 0.3% of domestic U.S. consumption.”31
Admittedly, these figures alone do not represent the aggregate results of similar
transactions in the long run. Generally speaking, lawmakers should assess the impact of
this transaction in a broader context. However, this case is significant in that Congress
acted as if it were an FDI regulatory body. Thus, allowing Congress to effectively block
transactions previously reviewed by the Executive Branch would result in increasing
unpredictability for foreign investors.
Huawei-3Com: In 2007, Huawei, teamed up with Bain Capital and announced its
intention to acquire U.S. electronics manufacturer, 3Com Corporation (3Com), which was
known for its computer infrastructure products, for $2.2 billion. Huawei would have held
16.5% of the company’s voting shares and appoint only 3 out of the 14 board members,
while Bain would have held 83.5% of voting shares and named the remaining 11 executives.
Despite the relatively small presence of Huawei, this proposed transaction still roused
concern in Washington and with CFIUS. Opponents of this acquisition pointed to the
possible connections between Huawei and People’s Liberation Army (PLA) based on the
fact that the Founder and CEO of Huawei, Ren Zhengfei, is a former PLA officer. Additionally,
Huawei’s reluctance to explain its intentions to acquire 3Com and disclose information
30
“The dragon tucks in,” The Economist, June 30, 2005, http://www.economist.com/node/4127399,
Accessed April 21, 2013.
31
Nanto et al.
32
about the company intensified the suspicion of Washington and CFIUS on whether Huawei
had a hidden agenda behind the deal.32 Given that telecommunications is considered
critical infrastructure, it is absolutely indispensable that concrete and clear-cut evidence is
provided by Huawei to address the concerns of CFIUS and Washington. Since the
transacting parties were not able to reach a mitigation agreement with CFIUS, Huawei was
eventually forced to withdraw its notice to CFIUS in 2008.
The concerns of CFIUS on information disclosure and Huawei’s cooperation during
the review process are consistent with those of the House Intelligence Committee. In the
investigative report about Huawei and ZTE, the Committee expressed its frustration about
Huawei’s attitude toward U.S. legal obligations by stating that, “Huawei, in particular, must
become more transparent and responsive to U.S. legal obligations” in its recommendations.
Ralls-Terna: In September 2012, President Obama blocked Ralls’ acquisition of
ownership interests in four Oregon wind farm companies owned by Terna, a renewable
energy company. This was the second case of a Presidential decision to block a transaction
attempted by a foreign company since 1990. Although Ralls is a registered American
company, it is owned by two Chinese nationals, who are respectively the Chief Financial
Officer and the Vice President of Sany Group (Sany), a Chinese manufacturing company.
According to the complaint filed by Ralls, the mission of the company was to identify
opportunities to construct wind farms in the U.S. that would use Sany turbines to
demonstrate the quality and reliability of their products to the U.S. wind industry. The
problem lies in the fact that the four wind farm companies are located either within or in
the vicinity of a restricted air space at the Naval Weapon Systems Training Facility, where
drones are tested.
Upon the completion of the deal with Terna, Ralls did not immediately file its
voluntary notification of acquisition with CFIUS because they assumed there was no
serious threat from Terna’s wind farm projects to the U.S. Federal Aviation Agency before
the acquisition. However, after being recommended by CFIUS to file a voluntary notice,
32
“Sale of 3Com to Huawei is derailed by U.S. security concerns,” The New York Times, February 21, 2008,
http://www.nytimes.com/2008/02/21/business/worldbusiness/21iht3com.1.10258216.html?pagewanted=all&_r=0, Accessed April 21, 2013.
33
Ralls officially notified the already completed transaction with Terna to CFIUS. During the
review process, CFIUS ordered Ralls to remove all stockpiles from the site, to cease access
to the site and to refrain from selling any items produced by Sany until CFIUS drew a
conclusion or the President took action in accordance with Section 721 (Section 721 of the
Defense Production Act of 1950). On September 28, 2012, the President issued an order,
stating that there had been credible evidence, which had led him to believe that Ralls and
its subsidiaries “might take action that threatens to impair the national security of the
United States” through the acquisition of wind farm project companies. Since the President
recognized that other existing legislature appeared not to have been able to adequately
address or resolve this matter, he then ordered the divestiture of the investment.
Given the orders issued by CFIUS and the President respectively, Ralls decided to
take legal action and press charges against both CFIUS and the President. Ralls’s complaints
mainly consisted of five parts: 1) CFIUS exceeding statutory authority by prohibiting the
transaction; 2) CFIUS’ arbitrary and impulsive action; 3) Ultra Vires action of CFIUS and the
President; 4) unconstitutional deprivation of property without due process by CFIUS and
the President; and 5) unconstitutional violation of the right to equal protection by CFIUS
and the President. Since the Presidential decision under Section 721 is statutorily
exempted from judicial review, many judicial experts initially thought Ralls’ complaints
would be dismissed.33 However, the Court decided that Ralls’ complaint regarding the lack
of due process after the President’s order was valid. The lawsuit will continue to the extent
that the Court recognizes Ralls’ objections.
The Ralls case bears significant implications for the U.S. FDI regulatory framework.
First, it clearly demonstrated that the current review mechanism lacks transparency from
the perspective of foreign investors, who are subject to uncertainty over CFIUS and
Presidential orders that may hinder their investments without guarantee of due process of
law. Secondly, the lawsuit opens the door to future legal action against CFIUS and the
President. Even if the Court makes a final decision that Ralls’s complaint does not have
33
“Chinese-owned Ralls Corp. sues U.S. over wind-farm order,” Bloomberg, September 14, 2012,
http://www.bloomberg.com/news/2012-09-13/chinese-owned-ralls-corp-sues-u-s-over-wind-farmorder.html, Accessed April 21, 2013.
34
merit at the end, CFIUS should not downplay the fact that its review process is now under
the scope of judicial review.
Reform of the Review Mechanism
Since the enactment of FINSA in 2007, there have been enormous changes to the
presence of FDI in the U.S. and how it is perceived. Major U.S. companies in various
industries have shared their experiences of being attacked by Chinese hackers.34 Victims of
Chinese cyber-attacks have tended to not disclose the attacks due to considerations of
stock prices and security, but it is widely believed that there are more unidentified hacking
operations originating from China.35 Meanwhile, the inflow of Chinese FDI has rapidly
increased during recent years. Against this backdrop, given the fact that over 85% of U.S.
critical infrastructure is controlled by the private sector36, it is becoming increasingly
challenging for CFIUS to fully identify operations under the disguise of FDI but with the
potential agenda to jeopardize U.S. national security. In order to achieve its primary goal,
CFIUS should implement reform consisting of two pillars: expansion of its mandate to
include greenfield investments and enhancing the transparency of the review mechanism.
Expansion of Mandate. Currently, only mergers, acquisitions and takeovers are
formally stipulated under Section 721 and CFIUS is not authorized to conduct investigation
on greenfield investments of foreign entities in the U.S. For example, under the current
framework, if Ralls started its own wind farm project as a greenfield investment in the
vicinity of the Naval facilities, CFIUS then has no legal mandate to investigate the project.
Given that the core issue of the Ralls case was not about the type of FDI but rather the
location, it exposes the inadequacy of the CFIUS mandate. Therefore, it can be argued that
the current review mechanism is effective enough to protect current U.S. national security
interests. However, in order to identify transactions that truly pose national security
34
“Hackers in china attacked the times for last 4 months,” The New York Times, January 30, 2013,
http://www.nytimes.com/2013/01/31/technology/chinese-hackers-infiltrate-new-york-timescomputers.html?pagewanted=all, Accessed April 21, 2013.
35
“Security experts say Google cyber-attack was routine,” BBC News, January 14, 2010,
http://news.bbc.co.uk/2/hi/technology/8458150.stm, “Coke gets hacked and doesn’t tell anyone,”
Bloomberg, November 4, 2012, Accessed April 21, 2013.
36
The Department of Homeland Security, http://www.dhs.gov/critical-infrastructure-sector-partnerships,
Accessed April 21, 2013.
35
threats, the mandate of CFIUS should be expanded so it can flexibly initiate investigations
based on comprehensive assessments of transactions without relying only on nationality,
shareholders and type of transaction.
However, this first pillar comes with the risk of sending the wrong signal to foreign
investors. If investors regard the reform as a sign of increased risks and a more closed
economy, FDI inflows to the U.S. may decrease, and the country will incur real and serious
costs. Thus, CFIUS should maintain its general principle that all transactions will be
approved unless there are potential national security threats. CFIUS should also reaffirm
that it will always utilize a comprehensive approach towards assessing transactions.
Additionally, Congress should also be receptive to reform, in recognizing that its mandate
in the review process is to make sure Exon-Florio is properly implemented, not to act as a
regulatory agency with influence in the decision-making process, as seen in the CNOOCUnocal case.
Enhancement of Transparency. The second pillar is consistent with an important
element of U.S. policy towards FDI, which is to encourage inward FDI in America. In fact,
with the enactment of FINSA, transparency of the review process has increased to a degree.
CFIUS now publishes annual reports to both Congress and the public, and it is mandated to
give briefings about various transactions when asked by Congress. However, these
provisions are mainly for the purpose of Congressional oversight of CFIUS. Reports to the
public rarely contain enough information for investors, and CFIUS briefings to lawmakers
are never disclosed to the public. Thus, increasing the transparency of the review process
to the public is crucial in order to better manage foreign investors’ expectations of the
process, thereby further stimulating FDI in the U.S.
On the other hand, it is not feasible to require CFIUS to disclose confidential
information pertaining to transacting parties and U.S. national security to the public. In
addition, the disclosure of such information may result in unnecessary and unexpected
speculation, thus increasing the possibility of politicization. In order to improve
transparency and avoid these risks, the Committee should improve communications with
investors by creating a liaison post, which is currently filled by private-sector actors. The
36
current system is not entirely neutral and communications may be influenced by thirdparties.
Therefore, the most important issue to be addressed through CFIUS reform is to
maintain the balance between ensuring national security and attracting FDI so the U.S. can
safely benefit from foreign investment. Recently, Huawei’s executive vice-president Eric Xu
announced the company’s decision to abandon the U.S. market altogether, saying that it is
“not interested in the U.S. market anymore” during its annual analyst summit.37 Although
Huawei is deemed a suspicious telecommunications firm by the U.S., the decision is
symptomatic of both the difficulty and importance of balancing two very different national
interests. Thus, as U.S. lawmakers and CFIUS implement these reforms, they should make
sure to convey a clear message that the United States will continue to welcome foreign
investors as long as there are no national security risks.
5. Policy Recommendations
This is a critical time for President Obama and his administration to seize on the lost
opportunities from his first term and address the U.S.-China relationship, arguably the most
important one of this century. Working with China as a partner rather than a competitor
will allow the U.S. to achieve its long-term goals of economic stability and prosperity and
maintain global influence. Particularly, China shares many of the same objectives and can
provide the necessary resources to propel America’s goals forward.
This paper presents a number of short, medium and long-term policy
recommendations for consideration. In the immediate term, we would like to encourage
more frequent and strategic dialogue between political and non-political actors such as
chambers of commerce and other business associations. We also recommend that the U.S.
and China both adopt more timely, consistent and accurate official data due to the impact
on major policy decisions. In the medium-term, the U.S. should encourage more greenfield
37
“Huawei ‘not interested in the US any more’,” Financial Times, April 23 2013,
http://www.ft.com/intl/cms/s/0/7b212314-ac28-11e2-a063-00144feabdc0.html#axzz2S0utH1XA,
Accessed April 30.
37
and portfolio investments, as well as reform its FDI review framework. Finally, from a longterm perspective, a better platform and regulatory framework must be established in order
to enforce greater accountability and governance going forward.
China faces a number of its own challenges, as the future of the political
environment and sustainable economic growth are bleak and uncertain. Currently, Beijing
is facing international opposition on its trade, military and foreign policies while also
dealing with domestic problems, especially social unrest and growing dissatisfaction with
the administration. The new leadership that has just taken office will be put to the test.
President Xi Jinping and Premier Li Keqiang will have to prioritize their policy agenda and
address the numerous problems ahead, including building economic governance, cleaning
up corruption, combating global warming and pollution, finding new sources of energy and
commodities, as well as participating as a global actor in major world affairs.
This is why it is critical to depoliticize the issues currently faced by the two nations
and advocate for a better relationship to encourage greater collaboration, trade and
constructive dialogue. If the U.S. is able to open its economy and industries to Chinese
investments, this will render positive effects on China’s competitiveness and spur
innovation in China. For example, the luxury goods market is a growing sector in China
which can lead to greater capacity to produce high-quality indigenous products. Giving
China greater access to the U.S. market can be contingent on China developing stricter
governance and becoming more legitimate stakeholders, which is in line with the long-term
interests of the U.S.
The ensuing recommendations are valuable to the current Obama administration
because they present innovative policy recommendations, as well as address the most
current and timely issues that require immediate attention.
Immediate Term Recommendations
First, it is apparent that President Obama and his new cabinet should recognize the
importance of the China relationship and the factors that will impact its direction in the
next four years and beyond. Thus, to further cultivate and improve ties with Beijing,
Washington must encourage greater political and economic cooperation.
38
China recognizes that the U.S. is still recovering from recession and taking steps to
address major domestic issues such as budget cuts, taxes, jobs and growing the economy. It
is also important for both sides to acknowledge current cultural barriers and
misperceptions, as the U.S. and China must develop mutual understanding for the very
different set of cultural, historical and political influences experienced. These experiences
have significantly shaped the way the two countries address problems, engage in
negotiations, adhere to rule of law, as well as the way they see themselves and their role in
global affairs. For example, the U.S. should endeavor to provide guidance and transparency
in navigating through the American regulatory system and identifying viable opportunities
for Chinese investors. It is also imperative that U.S. policymakers and legislators emphasize
that Chinese companies who are willing to adhere to U.S. laws and regulations are welcome
in the U.S.
Therefore, it is essential that expectations are managed during the process of
creating a more level playing field for the future of Chinese investments in the U.S. This also
sets an example for the rest of Asia, particularly for U.S. trading partners in Southeast Asia,
who are currently in the process of negotiating the Trans-Pacific Partnership (TPP). This
trade agreement could be leveraged to encourage China to improve its transparency and
governance, as well as relations with the U.S., given China’s concern that the U.S. is
increasing its influence in the Asia-Pacific region.
Another immediate recommendation is for the U.S. and China to work towards more
updated and complete official data. The global economy is still in recovery and extremely
fragile; it is now much more dependent on timely, accurate and consistent data, which
influences important market and policy decisions. Currently U.S. official data and BEA data
are at least 12-18 months old and Chinese official data is inconsistent regarding the
disclosure of state-owned company data. Think tanks and private firms have much more
updated data and definitions of state-owned enterprise, FDI and transparency. Therefore,
both sides have to make a conscious effort to establish consistent standards across markets
for norms, methodology of calculations and definitions and perhaps just for the BRIC
countries initially.
39
Statistical regulations implemented by the Chinese National Bureau of Statistics and
Ministry of Commerce since January 2007 are partially based on the ultimate beneficial
owner (UBO) methodology, which examines Chinese investments in major tax haven
regions such as Hong Kong, Cayman Islands, Bermuda, and the British Virgin Islands to
determine their ultimate destination. This method is in line with the methodology used by
the United States BEA. While public data on Chinese FDI destinations is still based on the
“immediate investing country” method and data under the UBO method is currently only
used for internal reference, there is great potential for China to officially adopt this method
in order to conform to U.S. and international FDI calculation standards in the short term.
Next, given recent news about the Chinese military and government’s industrial
espionage, further distrust has plagued both sides. The U.S. is reluctant to engage in further
discussion and treats all Chinese investments with scrutiny. The most effective way is for
both sides to develop greater mutual trust, through more frequent and industry-specific
dialogue. Specifically, the Strategic & Economic Dialogue established under the Bush
administration and continued under the current administration should be expanded to
include more industry conferences and high-level discussions to present mutual interests,
objectives and devise a plan for future cooperation to break down the barriers of mistrust.
The dialogue should include all major industries and especially concerning national
security, including defense, aviation, nuclear energy and weaponry, biological and chemical
weapons and agents, as well as proprietary technologies.
Another way to advocate for better relations is through increasing exchanges
between US and Chinese business and commercial interests. Organizations such as the
China-U.S. Chamber of Commerce and National Committee on US-China Relations and
China Institute create good will by facilitating non-political dialogue, which leads to
improved public relations in the long-run. Through increased academic and business
exchanges conducted by these active Chambers of Commerce, trade and cultural
associations, more strategic trust will be built on a broader level.
40
Medium Term Recommendations
During President Obama’s second State of the Union address, there was tremendous
emphasis on the issue of American national competitiveness, particularly in investing in
technology and alternative energy and creating jobs as he called for a “smarter government
that invests in broad-based growth.” President Obama’s domestic priorities include
creating new jobs in manufacturing, developing renewable and other sustainable sources
of energy to combat climate change, and attracting more private capital towards
infrastructure investments, particularly transportation for businesses..
Given both U.S. and Chinese strategic interests, the U.S. should encourage more
greenfield investments from China, as China has the necessary incentives both from the
national government to invest beyond energy and natural resources and from the market,
given more attractive prices and the strengthening of the CNY against the USD. Though
from a political and economic motivation perspective, some Chinese believe that there is
not as much innovation in the high-tech industries, so there is little advantage for them to
invest in greenfield. However, this is not to say that there are limited opportunities for
greenfield in the country as a whole, as it will lead to job creation and the revival of ailing
industries in the U.S. of mutual interest. In addition, since greenfield investments are not
subject to CFIUS review, foreign investors would expect to face fewer domestic political
sensitivities.
As of the end of 2012, Chinese firms already employ approximately 29,000 people in
the U.S., up from under 10,000 just five years ago. Additionally, this effort should be done
on a state-by-state basis, as the U.S. can already see the benefits of Chinese investments by
state and sector. As highlighted by the SelectUSA initiative of the Department of Commerce,
an information and advocacy platform to boost American competitiveness, the U.S. is very
much open to foreign investment, and all 50 states have representatives who are willing
and eager to promote their industries. While no formal government approval is required
for investment, all transactions qualifying as FDI are recommended to file with CFIUS.38
“Frequently Asked Questions.” SelectUSA Department of Commerce. Accessed May 8, 2013:
http://selectusa.commerce.gov/frequently-asked-questions#FAQMoveBustoUS
38
41
This translates into state policies that will attract foreign investments in the form of both
M&A and greenfield, in strategic industries with sustainability in mind for the long-run.
In addition to greenfield investments, the United States should also encourage
Chinese investors to increase their portfolio investments through taking smaller equity
stakes in shorter-term liquid securities such as equities, mutual funds and commodities.
This is a means of building confidence in Chinese investment practices and to familiarize
Chinese investors with the U.S. legal and regulatory system and specifically the SEC, CFTC
and other regulatory bodies.
With respect to the issue of state ownership, former President of the World Bank,
Robert Zoellick also noted that state-owned companies are playing an increasingly
important role in the world economy in all sectors. Therefore he argues that states should
“press for principles to require fair dealings by state-owned enterprises...and require new
rules so that private businesses can compete fairly with state capitalism.” Namely this
requires pushing for more transparency, adherence to international standards, nondiscrimination and other fair trade policies. Therefore, the U.S. should create and support
initiatives that push Chinese state-owned firms towards this direction.
Moreover, the U.S. needs to make extensive efforts to improve its FDI review
mechanism, by first providing more clarity in the definition and regulatory framework of
inward FDI. As discussed above, since the current system, which only deals with mergers,
acquisitions and takeovers, is not enough to ensure U.S. national security interests,
greenfield investment involving foreign investors should be covered as CFIUS’s legal
mandate. To do so, the government should clearly explain that the expansion of mandate
will never compromise U.S. open economy principles as well as its welcoming stance for
greenfield investment. The reform for further transparency that setting up a liaison for
foreign investors at CFIUS consists of a necessary part of assurance of America’s rigid
commitment to more open and attractive economy.
Meanwhile, according to Sauvant and Chen in their paper advocating the increase in
China-U.S. bilateral investment treaties, they argue that in order for both sides to improve
the general investment and trade framework, as well as develop mutual trust, a BIT would
further provide “protection for investors, a mechanism for dispute resolution and improve
42
market access.” The U.S. has substantial experience with BITs, after having negotiated more
than 40 over the past 30 years. Therefore, new Deputy U.S. Trade Representative,
Ambassador Demetrios Marantis must emphasize the interests of the United States in
establishing the terms and conditions for a better trade relationship.
A China-US BIT is a viable solution to the current trust deficit between the two
countries, particularly given growing concerns of Chinese government intentions to gain
access to sensitive information and critical technology. Given the increasing size of bilateral
trade, the two countries must work together to build a more level playing field for both
sides, particularly in promoting fair competition, the adoption of international standards
and ensuring a mutually-beneficial relationship going forward. The U.S. and China are in a
similar situation with regard to trade – it is mutually-beneficial for the two countries to act
together as partners rather than adversaries. As bilateral relations are not zero-sum, this
can be a good next step forward to improve this relationship.
Long Term Recommendations
Finally, the most pressing and fundamental of all agenda is for the U.S. to enforce
greater accountability and governance for Chinese companies investing in the U.S.
Washington must stress the importance for Chinese companies to adopt international
standards and practices, pay by the same rules and address issues of quality control.
Particularly, the U.S. will remain competitive and spur competition among foreign firms
entering into the U.S., and especially with Chinese firms.
It is also important to note that currently China does not yet see itself as a mature,
developed economy. The U.S. must encourage China to take on greater responsibility as an
international player. Therefore it is important to examine the history of this relationship
and make sure that the leadership at the highest levels is willing to establish a cooperative
relationship. Once it becomes a mature economy, its sense of responsibility will be much
greater and will be built on a platform of transparency, mutual understanding and better
knowledge of each other’s political systems. Thus, by reducing the amount of information
asymmetry and establishing a more level playing field will gradually close the trust deficit
between the two countries.
43
Conclusion
It is clear that the U.S.-China relationship will be one of the major predictors of the
future of global affairs, from a political, economic, trade and security perspectives. Based on
the lessons learned, it is imperative that the two countries establish trust and cooperation
in order to achieve mutual goals. Results have proven that the extensive evidence and
policy prescriptions support our research premise to improve U.S.-China relations through
mechanisms to increase Chinese FDI in the U.S. The aforementioned list of specific
recommendations sets forth the U.S. policy agenda towards China and should define the
priorities for this administration, in allocating resources and enacting policies for
investments necessary for long-term growth and innovation. President Obama should
recognize that he must do everything in his power to advance this relationship, as the
Chinese economy is projected to overtake that of the U.S. in the next 10-12 years. Therefore,
major policy decisions must be implemented to ensure that this strategic relationship leads
to mutual understanding and gain rather than distrust.
44
Appendices
Figure 1: M&A vs. Greenfield - Value
Figure 2: M&A vs. Greenfield – Deal Number
45
Table 1: Top 10 Destination States
Figure 3: Chinese FDI Destination States
Source: Rhodium Group China Investment Monitor. http://rhg.com/interactive/china-investment-monitor.
April 10, 2013.
46
Table 2 FDI Industry Breakdown Comparison for the U.S.
Source: U.S. Bureau of Economic Analysis. http://www.bea.gov/international/di1fdibal.htm. April 13, 2013.
47
Figure 4: Chinese Annual FDI Flows and Ownership
Source: Rhodium Group China Investment Monitor. http://rhg.com/interactive/china-investment-monitor.
April 10, 2013.
48
Table 3: Top 40 Chinese Investors in the U.S. via FDI until Dec, 2012
Note: The highlighted investors are private owned business entities.
Source: Rhodium Group China Investment Monitor. http://rhg.com/interactive/china-investment-monitor.
April 10, 2013.
49
Figure 5: China’s FDI in the United States
Sources: U.S. Bureau of Economic Analysis, Chinese Official Data, Rhodium Group
50
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