Making America More Competitive with Foreign Investment


Making America More Competitive with Foreign Investment

November 6, 1991 23 min read Download Report
Bryan Johnson
F.M. Kirby Research Fellow in National Security Policy

(Archived document, may contain errors)

864 November 6,1991 MAKING AMERICA MORE COmlTIlW WITH FOREIGN INTRODUCTION Foreign direct invest ment in the united States has ccpuibuted gmtly to the coulltly's economic grpwth over the past two centuries. In the 18008, kip capital financed most of America's bridges, canals, railroads and other infrastruc tun. Today, fmign investment is responsible fa the employment of 3.7 million Americans, Qll2tnllq~in wages to Americans, d$7 billion in research and development spending.

Yet despite the contribution of foreign direct investment to America's economic well-being, Congress is on the verge of increasin g the already tight restrictions on fmign investment in the U.S. In August, George Bush signed into law ICR 991, introdwed by RepresentativeThomas Carper, the Delaware Democrat. This bill extended the Exon-Florio pvision of the 1988 Omnibus Trade and Comp etitiveness Act that had expM in October 19

90. Sponsored originally by Nebraska Senator James Exon and then-New Jersey Congressman James Florio, both Democrats, the pvision ~stricts fareign investments for at legednatidsecuritynasons.

Greater Role For Co ngress. Many members of Congress now &tick Exon Florio faits failure to stop significantly the increase of fcmign direct investment As a result, many policy makers want a new provision even tougher than the original, lrequiring government review of all fm i gn investments and allowing Congress a greater say over when Americans can sell their enterprises to foreign- ers. Political rather than national security considerations likely would guide Con gress in such decisions. If the Exon-Florio provision is expan d ed, foreign invest ment would be discouraged and Americas economy would weaken American businesses increasingly face competition from enterprises in Asia the Eubpean Community, and a host of emerging market economies in Eastern Europe and Latin America. F o reign investment thus should be welcomed to America, not discouraged or driven out. Foreign investment capital finances new enterprises, expands existing businesses, and researches and develops new products and production methods. Yet despite the advantag e s of foreign invest ment, the federal government restricts or bans foreign ownership of airlines banks, shipping lines, and utilities. The current financial problems of airlines and banks in particular make clear the need to eliminate such restrictions: f o reign in vestments in such enterprises could save them from bankruptcy foreign capital to finance innovation and modernization, sometimes with success but sometimes frustrated by the federal government Example: Materials Research Carporation of America, b ased in New York, was During the past two decades, American firms have turned increasingly to purchased by the American subsidiary of Japans Sony Corporation, which provided the capital needed to keep the firm in business.

Example: Americas Moore Special Tool Company, based in Connecticut, was scheduled to sell a 40 percent share to Fanuc Ltd. of Japan to acquire needed capital. Protests from Congress killed the deal.

Example: The Bush Justice Department attempted to stop Semi-Gas Systems Inc an American fm based in Califha, from being purchased by Japans Nippon Sans0 KK. Semi-Gas had the Justicx Department restriction overturned in court.

Many members of Co ngress have become alarmed at foreign investment, fear ing that foreigners axe buying too much of America. The Exon-Florio provision ostensibly is meant to protect American businesses from acquisitions by foreign ers when it could damage U.S. security. Ye t the-provision poorly defines exactly when national security interests might be compromised by an acquisition. The result has been an increase of U.S. government oversight of many non-defense re lated investments.

The U.S. needs a more open market to foreign direct investment, especially in todays recession. To encourage the foreign investment that fuels economic growth, the Bush Administration should take five steps STEP #1: Repeal the Exon-Florio provision.

STEP #2: Allow foreign investors the freedom to purchase a larger stake in US. airlines and to operate domestic U.S. flights.

STEP #3: Allow foreigners to own and operate banks in the U.S 2 STEP #4: Inject greater competition Into .the commercial ship ping Industry by allowing foreign investors to own and operate ships within U.S. waters.

Allow foreigners to own and operate public utilities. STEP #5 By increasing foreign access to these areas, American fms gain capital for in novation and modernization. The increased competition in areas like commerc ial airlines and shipping, moreover, will benefit the U.S. consumer FOREIGN INVESTMENT IN THE UNITED STATES The U.S. traditionally has allowed foreigners to purchase and own businesses and other assets in its temtory. It has long been understood that the i nfusion of foreign capital helps spur economic growth. In 1791, for example, Alexander Hamilton urged the new federal government to allow foreigners access to the American market, arguing that foreign capital would be necessary for economic growth Hamilto n was right. During Americas early history, much of its infrastructure such as bridges, canals, and railroads, was financed by foreign investment.

Federal and state governments paid for these public works projects by issuing bonds. By the middle of the 180 0s, foreigners owned half of these state and local bonds, while holding about a quarter of all federal bonds? In addition, many private enterprises such as manufacturing facilities were owned by foreigners. The U.S. remained what is now pejoratively refer r ed to as a debtor nation-that is foreigners had more capital invested in America than Americans had invested overseas-until the early 1900s. Yet this debtor status in fact was a source of great economic strength. Only when World War I forced many European s to sell their American holdings did this situation change Attractive Market. In the past two decades, with foreign businesses growing prosperous and looking for places to invest, and with the American economy growing robustly as a result of Ronald Reagan s tax cuts, America once again be came a very attractive market for foreign direct investment. Foreigners poured money into the strong and secure U.S. economy. Foreign direct investment in the U.S. increased from $83 billiog in 1980 to $185 billion in 19

8 5. By 1989 it had reached a total of $401 billion. This inflow of foreign investment was both a cause and a consequence of Americas economic strength. 5 3 Michael V. Seitzinger, Foreign Investment in the United States: Major Federal Restrictions (Washingt o n, D.C Congressional Research Service, April 7,1989 p. 4 4 Patterns and Trends in Foreign Direct Investment in the United States (Washington, D.C US. Department of Commerce, International Trade Adminishation, April 1991, Staff Paper No. 91-2 p. 1 5 Barred a ,op.cit 3 Despite its growth in the 198Os, foreign direct invest ment still accounts for only a tiny fraction of total U.S assets. It amounts to less than 3 percent of U.S domestic net worth, or total value of all land and fixed assets held in the U.S and less than 1 percent of all U.S. 1 d holding as of 19

90. Thus concerns that foxigners are in a position to control America's economic destiny are ab surd. Ownership by American firms of a much higher percentage of assets in other countries, such as Canada , has not enabled the U.S. to farce the governments of these coun tries to alter their policies i Chart 1 When Measured Accurately U.S. Enjoys Investment Surplus Net Forelnn Direct investment Position (Billionel $300 260 200 160 $100 $60 SO 860 INVESTMENT SURPLUS I I I I I I 1083 1084 1086 1086 1087 1088 1080 Book Value Current Market Value Nom: Net FDI Poeltlon -US. FDI Poeltlon Abroad mlnus ForelQn FDI POaltlOtl In U.S Bourne: U.S Department of Commerce, Press HerltaQa Datachert Release. June 9. 1991 Mor e over, even though debtor status due to an inflow of investment is a source of strength, not weakness and even though America has enjoyed a surge of foreign investment in recent years, the U.S. still has more direct investments overseas than foreigners hol d in the U.S. The reason that many Americans ~IE misled into believing otherwise is because of deficiencies in the way assets are measured. Assets tend to be valued on the basis of their original cost, not according to their current value, which nor mally i s higher and indicates today's market value. Thus, although the value of foreign investments in the U.S. has surpassed the value of U.S. investments abroad on the basis of original cost, America's investments tend to be older. If current market values are used as the basis for calculation, US. investments abroad have a higher total value than foreign-owned assets in the U.S. Further the U.S. remains the biggest single foreign investor in the world8 6 From the rem& of Susan W. Liebelex, former chairman of t h e U.S. International Trade Commission, before the Committee on Ways and Means, United States House of Representatives, January 25.1990 7 See Christopherwhalen Should Americans Be Womed About Foreign Investment in the I! S Heritage Foundation Backgrounder, No. 7

20. July 20.1989 8 U.S. Department of Commerce. op. cir 4 THE BENEFICIAL IMPACT OF FOREIGN INVESTMENT IN THE U.S Foreign direct investment in the U.S. builds factories, spurs modernization, and creates jobs. Studies by the Department of Commerce est imate that foreign invest ment in the U.S. is responsible for the jobs of 390,000 Americans in California 330,000 in New Yark, 207,000 in Illinois, and 178,000 in Pennsylvania. In total approximately 3;7 million Americans-owe their jobs to-foreign investm e nt. And according to the Department of Commerce, foreign investment accounts for 9.1 percent of all the manufacturing jobs in America. Among the states gaining the most manufacturing jobs from foreign investment Maryland 13 percent Tennessee 12 percent Ge o rgia 12 percent, and North Carolina 11 per cent Largest Investors. Ac cording to the Department of Commerce, Britain was the single largest direct in vestor in the U.S. As of 1990, Britain had a total of 125 billion in investments in the U.S Japan had $78 billion, the Netherlands 62 billion and Canada $33 bil lion Mareover, these inves tors brought not only con tributed capital to American businesses and the economy, but also manage ment techniques, produc tion skills, and technology Chart 2 Total Foreign D irect Investment in the U.S.:1990 Netherlando $82 Bllllons of Dollar8 Note FDI poeltlon estimated using lQQ0 capitsl infiowe. Souroe Bureau of Economic Analysis Herltage DataChart In many cases this infusion of fureign capital and know-how has kept U.S fm s afloat that otherwise might have gone bankrupt. Japanese investment in the U.S. steel industry, far example, has injected large amounts of capital for modern ization and innovation.

This has helped turn around what was an inefficient and failing industry in the 1980s America. Without it, millions of Americans would be without jobs, many busi nesses would be forced to shut down, and capital for expansion, modernization and innovation would be much mure expensive for all firms. If America is to con tinue t o be a strong economic power, foreign investment must be readily available to U.S. fms In short, foreign investment has contributed greatly to the economic success of 5 RESTRICTIONS ONFOREIGN CAPITAL There is no specific constitutional provision granting t h e federal government the power to restrict foreign investment in the U.S. Yet many legislators point to the power to the federal government, granted in the U.S. Constitution, to regulate federal powers over immigration and naturalization? the power to re l ate inter state and foreign cornmerce,l0 and to provide for the national defense as jus tifications. for-limiting. foreign-investment. Based on-this reasoning, Congress has passed a variety of laws to limit or ban foreign investment in specific industries .

The argument is that notwithstanding any general beneficial impact, heavy foreign investment in certain industries may harm U.S. interests.The industries af fected include The Airline Industry. U.S. laws regulating the American aircrall industry prevent a foreign citizen from owning and operating a commercial aircraft within the United States or from purchasing more than 25 percent of an established American airline. These laws effectively prevent significant foreign investment in the U.S. airline indust r y. The= axe some exceptions. A foreign air carrier may operate within the United States, carrying passengers between two or more American cities, providing U.S. airlines receive nxiprocal access to the foreign airlines market h me. At the moment, no forei g n carrier operates in this way in the U.S. market Banking. Foreign ownership and investments in American banks have been regulated since 1791.13 Yet it was not until the International Banking Act of 1978 that uniform guidelines were established for banks o perating in the U.S.14 The Library of Congresss Congressional Research Service CRS) has found that certain of these Iegulations hinder foreign investment in the banking sector In an April 1989 report, for example, CRS analyst Michael Seitzinger notes that these requirements appear to have discouraged foreign entry by means of sub sidiaries because since 1791 Congress has uired that all directors of national banks must be citizens of the United States% This requirement was changed in 1978, but U.S. citizens still must make up at least two-thirds of the board.

The Maritime Industry. Title 46 of the UNted States Code comprises three majar laws which regulate foreign direct investment in the maritime industry. The Shipping Act of 1916, the Merchant Marine Act o f 1929, and the Merchant Marine Act of 1936 establish guidelines under which foreign direct investment is banned in such areas as commercial shipping and merchant marine services.

These laws thus prevent any foreign ownership of U.S. merchant shipping ves 1f 9 Article 1, Sec. 8, cl. 4 10 Article I, Sec. 8, cl. 3 11 Article I, Sec. 8, cl.12 12 49 U.S.C. App. 1401 (b 13 Chapter X, 1 Stat. 191 (1791 15 Seitzinger, op. cit, p. 22 14 P.L. 95-369.92 Stat. 607 6 sels.16 In addition, the Merchant Marine Act of 19 2 0, also known as the Jones Act, requires goods being transparted between U.S. ports to be carried on U.S ships Utilities. Title 16 of the U.S. Code establishes procedures for granting licenses for the construction, maintenance, and operation of facilities for developing, trans mitting, and using electric and other sources of power. These licenses are issued only to U.S. citizens or to domestic corporations. Similar restrictions exist for other types of utility. These must be owned and operated by American c ompanies or local govements. Although foreigners may invest in utilities, like telephone companies, they cannot own and operate such facilities. Included under the legal definition of a public utility is mineral extraction, including mining coal, copper g old and uranium. Mining on private lands is permitted to foreigners, but mining on federal lands generally is restricted to U.S. citizens and domestic corporations.

During the past two decades, the federal government has added more layers of regulation, ostensibly to monitor foreign direct investment. These include The International Investment Survey Act of 1W6.17 This Act requires the President to collect data on fo r eign investors. Jimmy Carter delegated this authority to the Departments of Commerce and Treasury. The Commerce Department collects data on the trends in foreign investment, while the Treasury monitors specific investments in an effort to protect national security and to avoid the transfer of sensitive technology. These departments publish reports on foreign direct investment.

The mestic and Foreign Investment Improved Disclosure Act of 19

77. This Act amended the Securities and Exchange Act of 1934 by requir ing any person owning more than a 5 percent share in a company registered with the Securities and Exchange Commission to disclose his citizenship and residence to the Commission.

The Agricultural Foreign Investment Act of 1W8.19This statute requires any foreign citizen who acquires an interest in agricultural land to report that investment to the Department of Agriculture 3 Support for such restrictions increased in 1987 when a U.S.-based company the Fairchild Semiconductor Company, owned by the Fren c h, was scheduled to be sold to Japans Fujitsu Limited. The Pentagon opposed that sale, claiming i This was peculiar reasoning, since Fairchild already was owned by French citizens. But Congress nevertheless passed the Exon-Florio provision the next year w o uld place a key high-tech U.S. military supplier under Japanese ownership. 40 16 46 U.S.C. 12102 (a 17 22 U.S.C. 3101 19 7 U.S.C. 3501 20 Stuart Auerbach, Cabinet To Weigh Sale of Chip Finn, Washingcon Post, March 12,1987, p. El 18 P.L. 95-213 7 The Exon- Florio Provisionl The Omnibus Trade and Competitiveness Act of 1988 granted the President the power to block the sale of an American owned company to a foreigner when such a sale might affect national security.

The Exon-Florio provision, contained in that Act stipulates that the President must first conclude that there are no other existing laws that can be used to stop the investment before invoking Exon-Florio HOW INVESTMENT RESTRICTIONS HURT U.S. ECONOMIC INTERESTS It has become clear in merit years tha t these restrictions on foreign investment are very damaging to many U.S. industries. Rather than protecting them from per ceived ham by foreign investors, the rules have denied those industries access to much-needed foreign capital. Faced with serious fin a ncial problems, for instance struggling American airlines and banks would benefit from an injection of foreign capital or even a buyout by foreign investors. But U.S. law makes this difficult, if not impossible. Similarly, the Jones Act and restrictions o n foreign ownership of U.S. merchant marine vessels has insulated the industry from competition and denied the industry less costly capital. This has raised the cost of shipping be tween U.S. ports. And aanks to the restrictions, the American consumer pa s an estimated $9.7 billion in higher prices on products shipped on U.S. vessels.

One of the most damaging of all the restrictions on foreign investment is the Exon-Florio Provision. The provision has given a previously non-existent power to the federal gov ernment. This power enables the U.S. government to prevent a foreign investment and even force an established foreign company to divest itself from an acquired U.S. company.

The rationale for the restriction is questionable to begin with. There is no em p irical evidence suggesting that foreign companies are targeting American high technology fms for purchase. If this were the case, then there would be a notice able increase in foreign purchases of high-technology interests compared with all investments. Y e t according to the Commerce Department, foreign acquisitions of high-technology industries actually decreased as a share of total foreign direct in vestment between 1980 and 1985, falling from 11.5 percent to 9 percent. From 1985 to 1988, foreign direct i n vestment in high-technology industries climbed back up to 11 percent. There is, in other words, n trend towards increased 11 foreign purchases of high-tech American firms. 2 High-Tech Flow. Some policy makers support restrictions on foreign acquisi tions o f American firms not so much because of concerns about foreign control of key firms but out of a fear that sensitive technology will be transferred to a com petitor in another country. This, it is said, would undermine American competi 21 The Economic Eff ects of Sign

cant US. Import Restraints, Phase 111: Services (United States International 22 Berreda,op. cit.

Trade Commission Publication 2422, Septembea 1991 table 1-2-7, p. 1-2-12 8 tiveness. Yet foreigners actually are acquiring less of Americas ,late st technology than Americans are acquiring from foreign fms. Using payments of royalties and licensing fees to measure the value of technology flows, technology transfers from foreign fms to their U.S. affiliates were five times greater than technology tr a nsfers from U.S. affiliates to foreign owners between 1980 through 1989 Moreover, while the U.S. does experience a high rate of technology transfer abroad, most of it goes to affiliated American companies operating overseas. In fact, less than 25 percent o f the transfers go to unaff~ated foreign companies A Committee on Investment. After signing the Omnibus Trade and Competi tiveness Act of 1988, Ronald Reagan delegated the authority for reviewing sales to foreigners under the Exon-Florio to the Committee o n Foreign Investment in the United States (CFIvS)F3 This committee was created in 1975 under the auspices of the Department of Treasury to monitor investments in the U.S. The Treasury committee was established in response to a perceived threat posed by in creased investment by several Middle Eastern countries during the OPEC crisis of the 1970s By the end of 1990, CrmJS had received some 575 cases. Of these, it deter mined that only twelve warranted a full investigation.U And of these twelve, the President had blocked only one. Two other purchase proposals wen withdrawn once the investigation began, and the others a~ still pending?5 to the American economy, since few purchases have been scuttled because of it in fact the provision has caused negotiating pro b lems for the U.S. aid adverse reactions abroad that threaten to escalate. For example, the U.S. is attempting to reach international agreements to eliminate barriers against foreign investment in the current Uruguay Round of the General Agreement on Tarif fs and Trade GAW trade liberalization talks. But Exon-Floxio restrictions on foreign invest ment in the U.S. are making it politically more difficult for the U.S. to mount a strong argument for its position in GATT.

In.addition, Exon-Florio has added to mo unting resentment overseas directed against formal or infmal U.S. efforts to keep foreign fms out of America. One example of the U.S. attitude was the reaction to the purchase in 1990 by Japans Matsushita Electronics Incorporated of MCA Corporation. In th a t sale, the Japanese firm also acquired an MCA subsidiary that operated concession stands at Yosemite National Park. Interior Secretary Manuel Lujan declared that the Japanese should not be allowed to own such a national treasure and the Japanese effectiv e ly were forced to sell the concession business Although the Exon-Floxio provision might seem to have done little direct harm 23 Executive Order 12661, issued on December 27,1988 24 In a N1 investigation the committee investigates the case and issues a rec o mmendation to the President 25 Foreign Investment, Analyzing National Security Concerns, Report to the Chairman, Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, House of Representatives by the UNted States General Accountin g Office (GAO/NSAID-90-94 Washington, D.C. March 1990, p. 9 9 Interim Step. The Exon-Florio provision was made permanent this August But Congress viewed that only as an interim step until lawmakers could broaden its scope. One proposal being considered by c ritics of Exon-Rorio provision who believe it does not go far enough is to subject all foreign investments to a govern ment committee investigation, whether national security questions are an issue or not. Other lawmakers .favor a direct role for Congress in such decisions. For ex ample, Representatives Richard Gephardt of Missouri and Me1 Levine of Califor nia, both Democrats, plan to introduce a bi to increase congressional oversight of the foreign investment review process?Such legislation is likely to b e intro duced in the 1992 session of Congress HOW INVESTMENT RESTRICTIONS FRUSTRATE U.S. FIRMS Proposals far even tighter federal government controls on foreign investment would harm, not help the U.S. economy. American businesses increasingly are turning to foreign sources of capital and technical support in order to remain com petitive. When a countrys savings rate is low, it decreases the amount of avail able capital banks can lend, and increases the cost of the existing capital. Tradi tionally, the U.S . national savings rate has been higher than the gross private domestic investment rate. Thus, there has been enough domestic capital to fuel domestic investment In 1980, however, this situa tion changed. The U.S savings began declining and foreign capital has been needed to fund domestic in vestment. Today, the U.S savings rate remains sub stantially lower than most of its competitors. Thus fmign capital has flowed from countries in the European Community and Japan to the U.S. This foreign direct investmen t has greatly benefitted American fms. In some in stances, it has even kept the fms from bankruptcy. In other cases, foreign invest ment has given U.S. com panies access to tech nologies that are far more Chart 3 U.S. Savings Rate Lags Behind Japan, Canada , Europe Amrage Q~M Saving6 Rate 18811888 a6u 1 aou 26U 001 16 1 ou 6U I U.

8. Brltaln France Canada Oarmany Japan Not Groaa Sevlnge Rate Savings 8.3 e Share of Gross Natlonel Product and Development. Herllage Datachart Boumr: Orgenlzatlon of Eoonomlc Coop eretlon 26 Council on Competitiveness,Foreign Investment Case Sparks U.S. Policy Debate, Challenges, April 1991. p. 4 10 advanced than they had access to previously. Some examples: poration (MRC based in Rockland County, New York, is an American fm produc ing semiconductor manufacturing equipment and silicon wafers used in computer chips. Sony U.S.A. is the American subsidiary of Japans Sony Cor poration, which manufactures mainly consumer electronics.

The Chairman and CEO of Materials Research Corporation, Sheldon Weinig explains 1hat.%1-1-989, [MRC],-which I .founded, was faced with a critical chal lenge: raise capital or probably fail. The capital we finally raised came from Japan. We 8~e now a wholly owned subsidiary of Sony U.S.A in 1988 we real ized t he company could not develop the next generation of equipment without fresh capital. Because of lower-than-ex ected activity in the worldwide semicon ductor markets, we were capital-short.

The company tried to raise the money through American banks, which would only reschedule MRCs existing debt. MRC sought help from its major suppliers such as IBM, who in the past had helped other suppliers. But IBM refused MRCs request. Then MRC went to Wall Street financiers, who recommended breaking up the company and selling its assets.The company turned to a European-based competitor interested in an acquisition. But that firm did not have the capital.

FinaUy, Sony apd to buy the company. This generated the capital necessary for MRCs modernization. The acquisition enabled MRC to stay in business strengthen its competitive position, keep its team of scientists and engineers work ing together on new techn o logies, and secured the jobs of its employees The Moore Special Tool Co.-Fanuc Ltd. Moore Special Tool Co based in Bridgeport, Connecticut, makes customized manufacturing equipment used in the production of high-tech products such as atomic weaponry. The com pany is the only American supplier of certain products used by the departments of Defense and Energy.

The company was having difficulty in 1990 finding domestic investors to sup ply the capital it needed for the research and development of new products and modernization of its facilities. But Fanuc Ltd the Japanese manufacturer of machine tools and robotics, in January this year offered Moore $10 million for a 40 percent minority share.The Committee on Foreign Investment in the United States and the Bu s h Administration agreed to the sale. However, after increased congressional com aints that the sale would jeopardize national security, Fanuc withdrew its offer nia, Semi-Gas is an American manufacturer of specialized equipment used in the production of s e miconductor chips. Nippon is a Japanese manufacturer of semi conductors. Nippon wanted access to American production facilities to gain more Materials Research Corporation-Sony U.S.A. Materials Research Cor 37 4 Semi-Gas Systems, hc.-Nippon Sans0 KK. Base d in San Jose, Califor 27 SheldonWeinig, The Guys in White Hats from Sony, New YorkTimes, June 10.1990, p F13 28 Council on Competitiveness, op. cir p. 4; Japanese Drop a U.S. Investment, New York Times, February 20 1991, p. D1; U.S. Clears Japanese SWe in Atomic-ArmsToolmaker, New YorkTimes, January 18,1991, p. As 11 market share in the U.S. Typical of Japanese companies, Nippon found it difficult to sell semiconductors in America as a result of the 1986 U.S.-Japanese Semicon ductor Apment, which restricte d the flow of Japanese semiconductors entering the U.S for $23 million.

Semi-Gas is a subsidiary of the American amspace firm Hercules, Inc. Her cules wanted to sell Semi-Gas, including its technology, to raise funds for re search and development projects. The technology that Nippon would acquire was considered by its owners to be "old" technology. Hercules had no intention of giving the Japanese access to its other technologies. The Justice Department, how ever, objected to the sale and tried to stop it o n national security grounds under the Exon-Florio provision. Hercules responp by taking the case to court, and this March won a ruling allowing the sale companies. Materials Research Corporation was on the verge of bankruptcy. It had tried all domestic ave nues and found no willing American buyers. Without the investment from Sony, the company would have shut down.

In the Moore Special Tool Company case, the persistent roadblocks erected by Congress forced the frustrated Japanese investor to pull out. In thi s case, just the threat of increased restrictions on foreign investment was enough to sour the deal To secure access to the U.S. market, Nippon offered to bby Semi-Gas These examples show that foreign investment can be very helpful to American HOW TO REFO RM INVESTMENT CONTROLS Foreign investment has greatly helped to sharpen America's competitiveness.

Most of America's infrasaucture was built with foreign capital. And today foreign capital employs millions of Americans and provides billions of dollars to U .S. companies for research, modernization, and the development of new products. The Bush Administration and Congress thus should remove restrictions on foreign investment, not add to them. Specifically, the U.S. economy would benefit if Congress were to t a ke the following steps STEP #1 Almost all of the cases that have been brought before CFIUS have turned out not to involve any threat to national security. Only one proposed deal was block ed by the President. Yet the threat of government investigations an d delays makes the U.S. less appealing to foreign investors. This denies many American fiis ac cess to foreign capital and thus limits their ability to compete Repeal the Exon-Fiorio provision 29 See BryanT. Johnson The U.S.-Japan Semiconductor Agreement K eeping up the Managed Trade Agenda,"

Heritage Foundation Buckgrounder No. 805, January 25,1991 30 "Court Lets Japanese Concern Buy U.S. Company New YorkTims, March 27,1991, p. D2; "Court Clears Way far Hercules Inc. Sale of Unit to Japan Wall Srreer Journa l. March 27,1991, p. A16 "Does Foreign Investment In U.S. Pose al'hmt." Washington Post, October 23,1990, p. C1 12 An expanded version of Exon-Florio, covering all foreign investments and giving Congress effective control over which companies can invest i n America would be disastrous. Such a provision rightly would be seen by foreigners as a tool for lawmakers to penalize particular foreign firms and as a backdoor device to close the U.S. market to foreign investment. Retaliation would surely result.

Thus an expansion of Exon-Florio not only would harm American firms operat ing in the U.S but also would threaten American fms operating overseas STEP-#2 Allowforeign-investors the -freedom to purchase a larger stake in U.S. airlines and to operate domestic fl ights.

Foreigners are prevented by law from acquiring more than 25 percent of U.S airlines and from operating domestic flights in the U.S. Allowing foreign pur chases and investments in this sagging industry would provide needed capital for several financi ally-strapped U.S. airlines. Scandinavian Airline Systems offer to invest a significant amount of money in Continental Airlines shows how foreign capital could save an American company. Texas Air, the holding company for Continental, already has lost one of its airlines Eastern to bankruptcy.

An infusion of foreign capital could help avoid further layoffs in the industry allow restructuring, and enable some U.S. airlines to expand their operations. In addition, the increased competition xesulting from perm itting foreign airlines to enter the American market would give more choices to travellers and spur greater efficiency in the industry.

STEP #3: Allow foreigners to own and operate banks in the U.S.

Foreign banks are heady regulated in the U.S. In partic ular, foreigners are not permitted to control the board of directors of a foreign bank operating in the U.S such as Barclays North America. Moreover, foreigners are restricted from owning a U.S. domestic bank like Citibank. Allowing foreign access to own a nd operate this protected industry would boost efficiency by allowing foreign banks to open across the U.S. Foreign investors also might be interested in buying out certain failing U.S. banks, enabling them to escape bankruptcy and thus avoiding bailouts by U.S. taxpayers.

STEP #4: Inject greater competition Into the commercial ship ping industry by allowing foreign investors to own and operate ships within U.S. waters.

Federal law currently requires that all goods transported between U.S. ports must be c arried in American ships, even when using foreign ships would reduce transportation costs and so lower costs to consumers. In addition, foreigners are prohibited from owning and operating American-flagged merchant vessels. These restrictions add billions o f dollars a year to U.S. products carried by ship. The lack of competition has made the industry inefficient and wasteful. Opening the industry up to foreign capital and competitors thus would cut costs to consumers and provide much needed incentives for the U.S. shipping industry to modernize.

STEP #5 Title 16 of the U.S. Code restricts foreigners from owning and operating U.S utilities, such as energy plants. But many state and local governments, as well as private firms, today are finding it difficult to raise capital domestically for mod All o w foreigners to own and operate public utilities 13emizing public utilities. This forces utilities either to raise prices to acquire invest ment funds or to increase their indebtedness by selling bonds. Yet in the past much of Americas infhstructure was b u ilt with foxeign capital. Today that nourishing inflow of capital is behg stifled by red tape CONCLUSION Foreign investmenthas made an.impartant contribution to Americas economic growth and has helped to improve the living standards of all Americans. Much of Americas inhstructure was built by foreign investment. Today, many com panies ate turning to foreign investors and partners to increase their capital resour ces for research and development, and to increase their access to foreign technol ogy. This all ows American fms to survive and expand in the face of fierce inter national competition.

But existing and proposed laws heaten that access to foreign capital. The im petus for these restrictions is the fear among some lawmakers that foreign direct investme nt results in loss of technology. But this is unfounded. There is no evidence that foreign fms target high-tech industries for takeover. Nor is there evidence of any net loss of technology seats abroad because of purchases by for eigners of interests in U .S. hs. Tightening cmnt foreign investment restric tions in response to unfounded fears would seriously cripple Americas ability to compete.

The world is growing ever more economically interdependent. Direct invest ment by foreigners in U.S. industries and American investment in foreign firms is a necessary part of that interdependence, and makes all the fms involved more efficient. It also raises the living standards of both Americans and foreigners.

Recipe for Strength. For the U.S. government to try to buck this trend would be economic suicide. That would allow hs in other countries to gain the benefits of using foreign capital while denying U.S. firms that same benefit. The result would be a reduction in U.S. competitiveness and a loss of jobs. Instead the Bush Administration and Conpss should work together to increase the ac cess of U.S. firms to foreign investment and to foreign competition. Trying to in sulate the U.S. economy from the rest of the world is a recipe for weakness, not strength.

Bryan T. Johnson Policy Analyst 14


Bryan Johnson

F.M. Kirby Research Fellow in National Security Policy