The United States is both the world’s largest foreign direct investor and the largest beneficiary of foreign direct investment (FDI). But like every sovereign country, it has sought to temper its embrace of open markets with the protection of its national security interests. Achieving this balance, which has shifted over time, has meant placing certain limitations on overseas investment in strategically sensitive sectors of the U.S. economy.
Established in 1975, the Committee on Foreign Investment in the United States (CFIUS) is a powerful interagency panel that screens foreign transactions with U.S. firms for potential security risks. Lawmakers expanded the committee’s powers in 2018 amid a rising tide of Chinese investment, and in 2022, President Joe Biden issued the first set of specific criteria for the committee to identify national security threats. Meanwhile, other Western countries, from Australia to the United Kingdom, are tightening their own scrutiny of foreign investments.
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How does the United States benefit from foreign investment?
Washington has traditionally led international efforts to bring down barriers to cross-border capital flows with the goals of expanding investment opportunities for U.S. multinational businesses and creating a more stable and efficient international system. The United States relies greatly on foreign inflows to compensate for a shortage of savings at home, and it routinely ranks among the most favorable destinations for foreign direct investors. Foreign direct investment—the ownership or control by a foreign entity of 10 percent or more of a domestic enterprise—plays a significant and growing role in the U.S. economy.
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According to research by the Department of Commerce, foreign investment supported some sixteen million U.S. jobs [PDF] in 2019, or 10.1 percent of the total labor force. On average, foreign firms pay higher salaries than their domestic competitors; they are also disproportionately involved in manufacturing.
What are the concerns over foreign investment?
Concerns with foreign transactions are typically associated with mergers, acquisitions, and takeovers of domestic firms rather than new investments, known as greenfields. The U.S. government, much like its peers around the globe, has passed legislation that empowers federal agencies to review foreign deals that could cause significant outsourcing of jobs, a loss of control over agricultural supply chains, the sharing of sensitive technologies, or impairment of critical infrastructure.
But many economists warn that imposing burdensome restrictions on FDI inflows could inspire retaliatory policies by other nations. To avoid this, the thirty-eight members of the Organization for Economic Cooperation and Development (OECD), as well as twelve nonmember states, have signed a nonbinding commitment to treat foreign-controlled firms on their territories no less favorably than domestic enterprises. Governments under this agreement are, however, provided considerable latitude to exempt sectors of their economies deemed essential to national security. Countries define this “critical infrastructure” in various ways [PDF], but most definitions include services and assets that, if disrupted, would have a significant negative impact on a country’s economy or national security.