Foreign Direct Investment, or FDI, is critical to the U.S. economy. Many cities and states owe their strong economic standing to the investment of foreign-affiliated companies. Across the country, contractors are benefiting from this investment with the construction of buildings, manufacturing facilities and other structures. While the investment fueling the industry is critical, so is the protection of national security interests. Tariffs, trade wars, infrastructure investment and policy changes are already having implications for the construction industry.
According to SelectUSA, the United States is home to the largest amount of FDI in the world. FDI is an investment in or acquisition of a business by an investor from another country who has authority over the management, operations and policies of the company purchased; for this reason, most governments want to track who invests in their country’s businesses. Globally, developed countries have been tightening restrictions on FDI. The United Kingdom and the European Union both adopted stricter controls in 2017. Historically, the U.S. has been about average in terms of its restrictiveness on foreign investment. Recently, however, Congress introduced two pieces of legislation that could significantly change traditional FDI assessments:
• The Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA), which seeks to modernize and strengthen processes undertaken by the Committee on Foreign Investment in the U.S. (CFIUS). The goal of the act is to more effectively guard against risk to U.S. national security posed by certain types of foreign investment. Presumably this could include areas such as artificial intelligence, robotics and aerospace, but it could also reach further. The law could restrict purchase or lease of real estate located in the United States “in close proximity” to a U.S. military base and/or other “sensitive” government facilities or properties by foreign individuals and companies. In addition, the legislation would also address acquisitions and joint ventures involving foreign-owned companies.
• The United States Foreign Investment Review Act of 2017 (USFIRA), intended to create a new process whereby the economic effects of certain proposed foreign investments in the U.S. would be reviewed by the U.S. Department of Commerce.
These bills are being presented to protect national security, in part by limiting foreign control of the country’s critical infrastructure. The U.S. Department of Homeland security defines 16 critical infrastructure sectors “whose assets, systems and networks, whether physical or virtual, are considered so vital to the United States that their incapacitation or destruction would have a debilitating effect on security, national economic security, national public health or safety, or any combination thereof.”
The question can be asked: Why even participate in FDI if there could be a national threat? The answer is that FDI is critical for developing economic prosperity. According to the Brookings Institution: Foreign multinational corporations that invest in the U.S. pay higher wages, offer greater benefits, exhibit higher productivity, provide more value-added to U.S. domestic inputs, import via superior access to external supply chains, export more goods and services, and engage in greater research and development than purely U.S. domestic firms. At the same time, foreign investors put competitive pressure on U.S. firms to upgrade their technologies, management practices and quality-control procedures, and often offer channels of learning for imitation by U.S. firms. Indeed, the most recent data show that 12 percent of all productivity gains by firms in the U.S. economy over more than two decades can be traced to spillovers from foreign investors.
FDI raises the standard of living for communities and creates opportunities for construction companies across the U.S., as well as giving the economy and businesses who are investing a competitive advantage because of the diversification, which typically increases return without increasing risk.
Striking a Balance
Many policy and legal experts believe FIRRMA will be passed in the next few months, while USFIRA may face a tougher road before being enacted.
Many have questioned the nature of CFIUS’s reviews and the expansion that is outlined under FIRRMA. Concerns center on the fact that previously the committee narrowly identified national security threats, whereas FIRRMA broadens the scope and requires CFIUS to judge if there will be any loss to the U.S. in terms of technological or industrial advantage, and to judge if sensitive information may be exposed. The bill also expands the jurisdiction of CFIUS and gives the committee authority over technology exports. If any threats across this broad spectrum are identified, the committee can advise the president to suspend or block an investment.
It is telling that only four investments have been blocked by past presidents. Concerns over China’s acquisitions, in particular, as cited by John Cornyn, United States Senator for Texas, are driving lawmakers to close existing gaps in the CFIUS review process. The new bill is a bipartisan effort to support the review of FDI to protect U.S. based companies and their technologies. The language in the bill is tailored to focus on national security concerns and distinguish between investments that are financially motivated and investments that are strategically motivated.
In addition, the legislation changes the review process timing. FIRRMA authorizes certain declarations for certain covered investments such as technologies, materials and infrastructure and increases the initial review period from its current 30 days to 45 days. Under extraordinary circumstances, CFIUS may extend the 45-day review period by an additional 30 days. For those in the construction sector, FIRRMA comes with significant improvements to the current process and is a reasonable approach to afford the key protection of intellectual property and infrastructure we must have as a country; many believe the bill will help the U.S. fight foreign trade barriers while allowing the country and state’s economy to continue to prosper.
A Precedent-Setting Move
On March 12, 2018, President Trump issued an executive order to block a proposed takeover of the U.S. tech firm Qualcomm by Singapore-based Broadcom. In late 2017, Broadcom had offered an unsolicited takeover bid that Qualcomm rejected, making the recent situation (in which Broadcom offered $117 billion) a hostile takeover. The two companies together represent a large portion of computer chip manufacturing.
Prior to President Trump’s order, CFIUS had voiced concern that the takeover could be a competitive disadvantage for the United States in the upcoming 5G “tech revolution.” 5G cellular technology is not only faster than previous iterations, it also supports much greater connectivity, including new technologies such as self-driving cars and remote medical care. Additionally, its transmission will be globally standardized.
A CFIUS memo released in early March gave insight into the group’s process and mindset. The memo stated CFIUS was looking at "the risks associated with Broadcom's relationships with third party foreign entities," as well as the "national security effects of Broadcom's business intentions with respect to Qualcomm." The letter was written by a Treasury Department official.
The Situation on the Ground
Contractors for federal projects must keep informed regarding the Trump administration’s implementation of CFIUS’s review process. According to Federal Publications Seminars, “If a foreign party invests in or acquires a U.S. government contractor – not just defense contractors – the parties may need CFIUS to review and clear the transaction. This process includes CFIUS reviewing the foreign party, the U.S. company’s industry and business, as well as the U.S. company’s past and current government contracts, supply orders and any export controlled or classified information.”
Additionally, “FIRRMA may require more extensive ‘mitigation’ of national security risks to clear deals, such as installing secure operating systems, firewalling foreign buyers from operations or prohibiting offshoring/outsourcing.”
Furthermore, President Trump’s recent announcement of his plan for improving the nation’s infrastructure calls for more private investment in infrastructure projects. The President’s plan calls for $1.5 billion of investment, with only $200 million coming from federal investment. The potential exists for investments in critical infrastructure such as roads, bridges, dams, water ways, water treatment facilities, power projects broadband and other projects. These projects could be subject to review under the proposed legislation. In addition, investment by foreign firms in U.S. design and construction firms, materials suppliers and technology providers could face more scrutiny.
A higher bar for contract procedures, delays in review and approvals, increased paperwork and more will be worth the extra effort if national interests are served by the changes to CFIUS review. 2018 will be a year to watch as U.S. lawmakers strive to balance protecting the nation’s interests with avoidance of protectionist policies.
This article originally appeared in Construction Executive.
