July 1980 - VOLUME 1 - NUMBER 6
Congress Eyes Investment Restrictions
Foreign Firms Stir Fearby Mark Anspach
In recent years, industrialized country governments have followed the lead of many Third World nations in imposing controls on foreign direct investment (FDI). Until now, the U.S. has bucked the tide,, but popular and business community fears of foreign investments are growing. Such sentiments have found a congressional voice in a report released August 8 by the House Committee on Government Operations attacking the few existing U.S. restrictions as "piecemeal, haphazard, and illogical," and calling for registration and screening of all FDI.
Rising FDI in the U.S. has sparked the outpouring of concern. Last year, for example, West German direct investment in the U.S. amounted to half the total for the previous 25 years combined. German companies recently bought major interests in W.R. Grace chemical and the A&P grocery chain. Such purchases are typical and relatively low-profile.
More sensitive are bank acquisitions, such as the widely publicized takeover of New York's Marine Midland Banks by the Hong Kong and Shanghai Banking Corporation, or transactions involving vital natural resources, such as Kuwait's offer to buy I S percent of Getty Oil, rejected by the Getty estate. Land deals also generate controversy. Amid growing opposition, more than $1 billion of FDI was sunk into Dade County, Florida real estate in 1979.
According to the report, two concerns engaged the committee. First, many fear that loss of U.S. sources of economic strength to foreign companies -particularly state-owned ones-could ultimately pose a threat to national sovereignty. Witnesses before the hearings by the Subcommittee on Commerce, Consumer and Monetary Affairs that led to the new proposals warned of OPEC influence over U.S. financial markets and lamented British Petroleum's control of Alaskan oil reserves.
The report stressed that "the political costs caused by foreign investment in the U.S. are particularly significant in national interest sectors of the economy, such as banking, food, steel, oil, high technology (including computers), and natural resources."
Perhaps equally important, a number of general economic and U.S. private sector concerns vied for attention. Not surprisingly, foreign takeovers of U.S. companies often antagonize the firms that find themselves swallowed and raise the specter of economic concentration. Acquisitions account for the bulk of FDI in the U.S. and attract most of the criticism. However, "greenfield" investments-building new facilities-usually rely more on capital from local U.S. commercial banks than on funds imported from the home country. In the long run these ventures may hurt the U.S. balance of payments when profits are repatriated.
But some proponents of a screening mechanism for foreign investments are less intent on keeping them out than on using access to the U.S. as a bargaining chip to win favorable terms for American companies abroad.
The committee declared that none of these considerations could be weighed properly without first identifying and measuring FDI. Commerce Department figures show that FDI in the U.S. rose from $25.1 billion in 1974, when the boom began, to $48.5 billion in 1979. But the committee report suggests these statistics are of little value: "Federal efforts to monitor FDI in the U.S. and its impact on America's national interests are so inadequate, disjointed, and poorly implemented that federal estimates of the total amount of FDI constitute little more than guesswork."
The subcommittee that prepared the report under the direction of Chairman Benjamin S. Rosenthal (D-N.Y.) examined the activities of 17 federal bodies involved with FDI and found "uncritical acceptance and promotion of foreign investment" prevalent.
Seeking the information needed to abandon the present "indiscriminate" policy of "neutrality with encouragement," the committee recommended that the government register all FDI, making public the sales and assets of each foreign firm and the nationality of the ultimate beneficial owners with whom true control resides.
The registration agency would also perform a screening function, evaluating the costs and benefits of individual FDI transactions. Modeled on similar entities in Canada and Mexico, the agency would be empowered to impose conditions-such as requiring foreigners to form joint ventures with Americans, or to create a certain number of domestic jobs. In addition, the agency would have the power to bar investments whose harmful effects are deemed to outweigh any benefits that could be obtained.
Determining the ultimate beneficial owner is particularly important for reaching political judgments about the national security impact of specific investments. The committee report complains that current surveys do not trace ownership to the (country of origin. The Commerce Department's chief economist, Courtenay M. Slater, acknowledged at hearings last year that an OPEC investment channeled through a Luxembourg corporation would be listed as a Luxembourg investment. "The feeling in the executive branch has been that the major question is `Is it foreign-owned or not?' and it's less important as to exactly which country owns it ultimately," explains George M. Kruer, chief of international investment at Commerce's Bureau of Economic Analysis.
The subcommittee will devote a subsequent report to the question of OPEC investments, which are politically sensitive even though they tend to be portfolio rather than direct investments. It did, however, find one OPEC issue worth addressing immediately. Despite administration denials, the subcommittee study ties official unwillingness to disclose Middle East OPEC investments in the U.S. as a country-by-country basis to a secret, informal agreement between the U.S. government and Saudi Arabia and Kuwait. The report says the agreement began in 1975 as a quid pro quo for Saudi purchases of U.S. government securities, but it extends to all Mideast OPEC assets in the U.S.
The report asserts the Treasury Department is guarding the OPEC country totals so zealously that it has refused to share them with other federal bodies-not even with a high-level panel studying the possible withdrawal of Iranian assets from the U.S. Douglas F. Lamont, dean of the Walter E. Heller School of Business, testified before the subcommittee that the withholding of timely information from foreign exchange traders contributed to a run on the dollar in 1978 when the Saudis unloaded nonmarketable government securities-"twilight paper"-that they had bought in 1976.
The subcommittee found that reluctance on the part of federal agencies to share data with one another and the public was not limited to OPEC information. Urging greater cooperation, the report recommends "sweeping changes" to improve information gathering and coordination. ,
Registration receives widespread support as a systematic means of obtaining information on FDI. Stefan H. Robock, a professor of international business at Columbia University who worked on a 1976 Commerce Department study that recommended against registration, now says he doesn't "take too seriously" the argument that registration would deter foreign investment, adding that most countries already require registration. `
Like many registration advocates, Robock is more dubious about how screening would work. Screening would be a major departure for the U.S., which in the past has appealed for other countries to relax their restrictions. The committee proposes a presidential commission to study the kinds of restrictions and requirements that a screening agency should employ.
Some fear that a screening agency would act more to defend U.S. business interests than to protect U.S. political independence. "The concept of national security per se should be kept as narrow as possible because there is a long history in trade policy of abuse of national security," says Cohen. "I would not like to see takeovers of U.S. firms avoided simply because they can wrap the flag around themselves."
Just as critical as the debate over national versus business interests is the possible conflict between domestic and international economic concerns. Some parties hope that a new policy on foreign investment at home will be tailored to serve major U.S. corporations abroad by compelling a rollback in restrictions facing them, in other countries. The Heller School's Lamont suggests that a screening agency could bargain to open up foreign markets to U.S. companies in return for allowing foreign firms into the U.S. Privately, Rosenthal subcommittee staff members oppose this approach, believing that a foreign investment should be judged on its merits rather than on the investment regulations of its home country.
However, for some American multinationals, supporting a U.S. investment offensive overseas ranks ahead of defending national sovereignty or the health of domestic industry. Another House panel solicited private sector opinions more actively than the Rosenthal subcommittee and produced a bill that aims to establish reciprocity between laws governing foreign investment in the U.S. and in other countries, A Commerce subcommittee held hearings in August on H R 7791, which would allow investors from a foreign country to purchase U.S. securities "only to the extent that the laws of such foreign country are no more restrictive with respect to the acquisition of comparable amounts of foreign securities" by U.S. investors.
"We hope that the bill would force other countries to ease up their regulations," says Monique Henderson, a staff researcher for the subcommittee. Explaining the current burst of congressional activity on this issue, she notes, "The U.S. economy has been doing so badly in the last year or so, Congress is becoming increasingly concerned and looking for ways to help U.S. companies out."
Not everyone is convinced that screening is the best strategy even if one accepts the proponents' objective. While some tout screening as a means of wresting concessions for American multinationals abroad, others reason that the U.S., with its greater share of FDI, stands to lose more than it would gain if it risks starting a new round of protectionist moves and, countermoves. "Others would be provoked if we were to shift our attitude," Cohen cautions. "Direct investments once made are the hostages of the host country."
The Rosenthal subcommittee plans to grapple with the question of foreign investment in banking in a later report. Other studies will explore foreign holdings of commodities futures and OPEC assets in the U.S. Although the subcommittee's current recommendations are unlikely to inspire. any major changes until after the November elections, the controversy over FDI will not soon die. Businesses in the U.S. and abroad have too much at stake.