This week the Treasury Department released new regulations that represent the tip of the spear in American efforts to maintain its technological and geopolitical leadership. Two years ago, Congress granted a little-known government interagency body called the Committee on Foreign Investment in the U.S. (CFIUS) new powers through the creation of the Foreign Investment Risk Review Modernization Act (FIRRMA). Amid intense coverage of domestic and international crises, the public can be forgiven if these regulations aren’t front of mind. Yet, attention should be paid because the impact of this law – which comes into full effect on Feb. 13 – will be far greater than the law’s anodyne acronym suggests.
Today, investments directed into the United States can be as consequential to geopolitics as the spy was to global competition in the 20th century. A spy stealing government secrets or infiltrating an agent of influence into a foreign military was a hallmark of Cold War thrillers because that global competition was largely about defending international borders and trade routes through military power that came from government secrets (e.g. nuclear weapons technology) and massive government Research & Development funding. In this environment, James Bond like figures penetrating military installations and stealing documents could have major impact on the global balance of power.
Today’s reality is different in at least three significant ways. Increasingly geopolitics doesn’t pivot on political boundaries as much as it does on technological demarcations—that is control over technological standards and commercial integration. The front lines of contemporary competition aren’t borders but the standard and norm-setting over new technologies such as the battle over the deployment of 5G networking infrastructure. Rival political blocks will be unified not so much by ideology, like the Soviet Union, but by common technological infrastructure.
Second, the composition of Research & Development spending has flipped between the private and government sector shifting the most sensitive information into corporate hands. In 1964, the federal government funded 67 percent of US R&D and as such served as the primary catalyst for technological innovation. Today, the private sector, academia, and nonprofit organizations provide more than 88 percent of US R&D funding, with private industry funding almost 70 percent of the US total as noted by William Greenwalt of The Atlantic Council.
Third, authoritarian capitalist states like China have succeeded in exploiting America’s open markets to further statist ends. One of the catalysts for FIRRMA was recognition by the Defense Department that foreign investors now invest in the newest and most relevant technologies at the same rate as Americans. This is especially concerning for defense officials charged with sustaining the U.S. defense industrial base and who have noted that the supply chains for U.S. military equipment and services are increasingly vulnerable to foreign firms.
These characteristics of contemporary competition grant predatory foreign investment far greater geopolitical influence than in the past. While espionage will remain a tool of global competition, stealing a secret military design is increasingly less useful than exercising financial control over companies with more current technology that are still churning out new innovations.
The expansion of CFIUS’s authority is America’s attempt to meet this challenge. The new regulations mark a historic expansion in so much as Congress directed CFIUS to protect the United States against investments that threaten to impair national security while setting wide parameters for the committee to determine precisely what that means in practice. Critical terms, such the meaning of “foreign control” of a U.S. business give regulators a lot of space for interpretation. For the first time, there is no exemption for transactions below a minimum threshold meaning that scrutiny will be extended into even non-controlling investments of less than 10% ownership.
The new regulations are explicit in identifying businesses that control technology, infrastructure, and personal data to be of heightened interest. This includes businesses that produce, design, test, manufacture, fabricate, or develop technologies deemed to be “critical”; or own, operate, manufacture, supply, or service “critical” infrastructure; or maintain or collect personal data judged to be “sensitive” and a “threat to national security” by the U.S. government. Reviews of companies in these sectors will focus on foreign investor rights such as access to non-public information and a role in the company’s decision-making. Additionally, the regulations extend review over real estate transactions with a new focus on transportation chokepoints and locations of value to foreign intelligence agencies.
Congress produces a lot of words with little effect, but FIRRMA’s language can move money and in doing so has real world impact. A total of $1,894,000,000 in transaction value across fourteen cases has been prevented or unwound already due to U.S. national security concerns. And the number of cases is growing. In 2017 there were 237 notices and 172 investigations compared to 65 and 25 respectfully in 2009. The U.S. government’s authority to review transactions of firms – even if not notified – means the committee wields a sword of Damocles that can sever already completed mergers and acquisitions with billion-dollar consequences. The adroitness with which CFIUS manages its new power remains to be tested, but it’s certain that the Committee will play a central role in shaping America’s technological standing in the world.