Academic journal article Texas Law Review

Foreign Direct Investment and National Security Post-FINSA 2007*

Academic journal article Texas Law Review

Foreign Direct Investment and National Security Post-FINSA 2007*

Article excerpt

I. Introduction

In 2007, the U.S. Congress passed the Foreign Investment and National Security Act1 (FINSA). The Act represents the most recent legislative effort to define the role that national-security concerns should play in the regulation of foreign investment. FINSA came on the heels of discontent over the government's response to the widely publicized Dubai Ports World debacle, and it barely preceded a flurry of discussion about the rise of sovereign-wealth funds in international capital markets. As such, FLNSA was a timely addition to debates in the United States over the proper balance between open economic policy and national security. In its current form, this debate stretches back nearly two decades, to the passage of the Exon-Florio Amendments to the Defense Production Act of 1950.2 Since the adoption of Exon-Florio, the discussion has revolved principally around the process put into place by the Amendments for reviewing transactions involving foreign persons and entities. At present, the Committee on Foreign Investment in the United States (CFIUS), an interagency body headed by the Department of Treasury, is charged with reviewing foreign-investment transactions for potential security threats. Consequently, most discussion of how to handle incoming foreign direct investment (FDI) has focused on the CFIUS and reforms of its implementing legislation and regulations.

Less attention has been paid, however, to developing a comprehensive approach to how national security should be protected in the internationalinvestment sphere. That approach should involve finding an adequate balance between the need for continued capital inflows into the United States and the need to address realistic threats to the nation's sovereignty and national security. Thus, while practitioners have sought to explain what types of transactions trigger CFIUS review, few have stepped back to ask what types of transactions should lead to such scrutiny and what form such scrutiny should take.

This brief Note attempts to put the dangers posed by foreign investment into perspective by looking at both the threats to national security raised by transactions involving foreigners and the regulatory framework designed to address those threats. While proponents of a largely free investment market view the CFIUS review process as too cumbersome and uncertain, believers in a more protectionist and circumspect national policy will find the CFIUS too lenient. The Note ultimately argues that, as it stands, the current system employed in the United States is unlikely to serve the interests of either side of the debate. This Note contends that neither national security nor the domestic economy will benefit from continued attempts to reform and improve how the CFIUS operates. As a response to this apparent impasse, this Note proposes the use of limited, government-owned shareholder rights - modeled after traditional "golden shares" employed in the United Kingdom and elsewhere - as a means of protecting those areas most vulnerable and important to national security, while at the same time leaving room for foreign investment in the vast majority of sectors and industries.

This Note proceeds in three main Parts. Part II discusses both the importance of capital inflows into the United States and the potential national-security risks presented by incoming foreign direct investment. Part III looks at the legislative and regulatory framework currently in place in the United States and demonstrates its inability to adequately satisfy either the desire for continued incoming investment or the need to defend national security. Part III goes on to discuss the use of golden shares in the United Kingdom and some advantages associated with that practice. Finally, Part IV advocates the use of a modified and diluted form of golden shares in select sectors of the U.S. economy. Part IV also applies this alternative approach to two controversies in which the CFIUS has been involved - the failure to prevent the acquisition and relocation of Magnequench's plant to China, and the question of how the United States should react to the rise of sovereign- wealth funds. …

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