Twenty-five years ago, Japan’s economic might — ostensibly backed by smart industrial policy, cartel-like keiretsu linkages and cheap bank credit — was the source of fear and loathing in Washington. Today, of course, all eyes are on China, but the atmosphere surrounding Chinese investment in the US has a very familiar feel.
Congress established the US–China Economic and Security Review Commission in 2000 to monitor the national security implications of bilateral economic ties with China. A hearing in February 2012 (at which I participated as a witness) was called to examine policy responses to Chinese state-owned enterprises (SOEs), and more specifically the challenges that Chinese government ownership poses to US companies competing in China and within the US. It is only a slight exaggeration to say that at many points in the proceedings, if the word ‘China’ were substituted for ‘Japan’, the debate could literally have been a transcript of congressional testimony in the 1980s. This sense of déjà vu may be either wearying or amusing depending on one’s appreciation of political theatre.
Despite some important differences between US–Japan and US–China bilateral relations, the Japanese experience may provide important clues as to what we might expect as Chinese firms begin navigating the complex political, legal and cultural landscape of foreign investment in the US. A few observations can be made in light of this history.
Most basically, we need to distinguish between the political and legal environment for foreign direct investment (FDI) at the federal level and in the local communities where the investments are actually made. At the national level, Chinese firms (particularly SOEs) will confront substantial wariness when dealing with Congress and federal agencies. Before a foreign buyer acquires a US firm, the transaction should be cleared by the Committee on Foreign Investment in the United States (CFIUS), which is charged with screening foreign acquisitions of US companies for threats to ‘national security’ and ‘critical infrastructure’. These exceedingly broad and vague terms are left undefined in the law — thus increasing the discretion of CFIUS.
This process was established in the 1980s in response to congressional fears of strategic technology transfer and industrial espionage by Japanese acquirers. Technically, submitting a transaction for review is voluntary, but failure to do so leaves the deal open to being unwound on national security grounds — meaning any well-advised foreign acquirer, particularly a Chinese acquirer, treats the process as mandatory. Yet the prospect of triggering regulatory scrutiny almost certainly deters some Chinese investments, particularly in the aftermath of CNOOC’s infamous — and unsuccessful — bid for Unocal in 2005. The CFIUS process was a focal point in the political firestorm that led CNOOC to abandon its offer.
Given the prevailing sentiment during the congressional hearing in Washington, it seems possible that Congress will attach additional screening measures to the CFIUS process out of its wariness of Chinese FDI. Members of the commission seemed attracted to the Canadian approach to screening foreign investments, which includes a ‘net benefit’ test. That is, government reviewers are required to assess whether an acquisition of control by a non-Canadian company is of net benefit to Canada. In the case of a foreign SOE acquirer, the reviewers assess whether the Canadian business will still have the ability to operate on a commercial basis. The net benefit approach seems like an invitation to endless holdups and logrolling by domestic corporate and political stakeholders. Yet it is hard not to sympathise with policymakers in Washington; the US foreign investment regime (and many other aspects of its market regulation, such as the antitrust regime and securities laws) was not designed with Global Fortune 500 companies connected to an authoritarian party state in mind.
The Japanese experience suggests that while the federal political and regulatory climate may be very problematic for Chinese firms, US state and local governments, as well as communities — where the businesses will actually operate — are likely to be much more receptive to Chinese investment. This is particularly true of greenfield investment, as opposed to acquisitions, although most economists view the two forms of FDI as essentially interchangeable. Japanese investors learned the hard way that passage into the US is much smoother if a foreign firm integrates fully into the local community. Integration is facilitated by consistent and positive interaction with local suppliers, business people and politicians, and by learning as quickly as possible what it means to be a ‘good corporate citizen’ — through employment practices, philanthropy and community involvement. Admittedly, for some Chinese firms, especially SOEs, this process may be significantly complicated by government ownership and Communist Party involvement in corporate personnel decisions.
Japan’s long-term experience of investing in the US ultimately provides a positive example for Chinese investors. Despite the clamour in the 1980s, Japan is now an important, uncontroversial source of US-directed FDI. Japanese affiliates employ hundreds of thousands of American workers, and a solid network of government and private sector actors help to sustain a relatively healthy bilateral investment climate. While a significant increase in Chinese FDI will almost certainly be met with considerable political backlash, 20 years from now, congressional and media attention will likely be elsewhere, while Chinese affiliates quietly go about their business in the US.
Curtis J. Milhaupt is Parker Professor of Comparative Corporate Law and Fuyo Professor of Japanese Law at Columbia Law School.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘China’s Investment Abroad’.