Evaluating CFIUS in 2021
The Committee on Foreign Investment in the United States (CFIUS) released its unclassified Annual Report to Congress for 2021 on August 2, 2022. The first comprehensive review of expanded CFIUS activities authorized by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), this new report sheds light on the evolving role that inbound investment screening plays in the U.S. economic security toolkit. Significant growth in the number of CFIUS notice filings, covered notice reviews, and investigations suggest a future where U.S. economic security concerns will continue to intersect with cross-border financial and technological flows, particularly with China.
Q1: What is CFIUS and how does it operate?
A1: CFIUS is an interagency committee tasked with reviewing national security concerns arising from foreign investment in U.S. companies. The committee’s work forms the basis for a key tool of U.S. economic statecraft: inbound investment screening. By reviewing, assessing, and controlling the flow of foreign investment into industries significant to U.S. national security, CFIUS gives the president agency to steer financial and technological flows with national security objectives in mind.
First established by President Ford in 1975 under Executive Order 11858, the committee’s membership, authority, and jurisdiction have expanded under several executive orders and congressional statutes, most recently under FIRRMA. Today, CFIUS is chaired by the Secretary of the Treasury and is comprised of representatives from 16 federal departments and agencies. It reviews and advises the president on “covered transactions” within its jurisdiction. CFIUS has a broad mandate—any transaction with a foreign entity that could control a U.S. business can be defined as a “covered transaction”—and informs the president’s ability to block foreign investments in U.S. companies on national security grounds.
When transaction parties believe they are engaging in a “covered transaction,” they can voluntarily notify CFIUS of the transaction and solicit their review. Transactions involving U.S. businesses that have critical technology, critical infrastructure, or personal data collection operations (“TID U.S. businesses”) are required to be notified to CFIUS. The committee can also initiate a review of an alleged “covered transaction,” even if its parties have not voluntarily notified CFIUS.
Parties can notify CFIUS of a transaction with a declaration (a shorter process) or a joint voluntary notice (a more comprehensive process). Declarations can expedite the CFIUS process for easily clearable transactions, but for more complex or concerning transactions, CFIUS can request a notice even if a declaration was filed. In both cases, CFIUS will conduct an initial review on national security grounds to clear the transaction. If a national security concern is identified, CFIUS will initiate an investigation to recommend if the president should approve, disapprove, or approve the transaction with mitigation measures. Most transactions reviewed by CFIUS do not proceed this far and are cleared without impediment or mitigation. However, some high-profile CFIUS cases have warranted a presidential declaration, such as when President Obama blocked a Chinese state-owned enterprise (SOE) from acquiring the U.S. business of German chipmaker Aixtron SE.
Q2: Why was this study of CFIUS activities commissioned?
A2: Over the past decade, a surge in foreign direct investment (FDI) in the United States has raised questions about foreign control of key U.S. companies. Since the 1990s, FDI in the United States has drastically increased, growing from $71.23 billion in 1990 to a peak of $511.43 billion in 2015 (measured in current U.S. dollars). This mid-decade peak in FDI was largely correlated with a similar peak in mergers and acquisitions (M&A) transactions in the United States, as firms in many industries consolidated to remain competitive. Between 2013 and 2019, much of this growth in FDI was a result of Chinese FDI into the United States, which surpassed $50 billion in 2016.
Heightened national security concerns about growing Chinese FDI from Wall Street and Silicon Valley to Detroit and Hollywood propelled further regulatory scrutiny of M&A transactions. Against this backdrop, Congress introduced and passed the bipartisan FIRRMA to strengthen CFIUS against a perceived increase in national security risks associated with growing Chinese FDI in the United States. Among other changes, FIRRMA broadened CFIUS’s oversight jurisdiction, shifted the filing requirement for certain transactions from voluntary to mandatory, established a new two-track declaration and notice process, and bolstered CFIUS funding and staffing. Though CFIUS has submitted annual reports to Congress since 2008, the 2021 report is the first to reflect the full scope of changes that FIRRMA made to CFIUS’s authority and process.
Q3: What did this study find and what were its key conclusions?
A3: Treasury’s study found that CFIUS reviewed a record-breaking number of transactions in 2021—with 164 declarations and 272 notices filed last year. The number of declarations and notices filed grew significantly compared to 2020, with over a 30 percent and 45 percent increase, respectively. CFIUS nearly doubled its investigations compared to last year, largely due to notice refiling and increased case complexity.
Last year also saw the highest number of notices withdrawn after the commencement of an investigation, growing from 28 in 2020 to 72 in 2021. Most of these withdrawal instances were done to refile and better address national security mitigation concerns, though nine transactions were abandoned fully due to national security or commercial concerns. This suggests that foreign investors and U.S. acquisition targets are increasingly cognizant of CFIUS compliance and the commercial or reputational concerns that are associated with CFIUS blocking a proposed transaction.
Transactions involving U.S. financial and technology companies represented the highest number of declaration and notice filings in 2021. With respect to declarations, the industries with the most declarations were software publishers (11); computer systems design and related services (10); electric power generation, transmission, and distribution (9); semiconductor and other electric component manufacturing (7); and management of companies and enterprises (7). With respect to notices, 75 percent were in the finance, information, and services sector or the manufacturing sector. The financial, information, and services sector saw a notable increase in notifications since last year, growing from 38 percent of 2020 notices to 55 percent of 2021 notices—mostly in the professional, scientific, and technology services and publishing umbrellas.
Chinese investors triggered the greatest number of covered notices in 2021, though remained below their historical highs. Chinese covered notices nearly doubled from 17 in 2020 to 44 in 2021, far outpacing growth in second- and third-place Canadian and Japanese covered notices, respectively. However, the number of Chinese filings in 2021 remained below the average of 56 notices per year Chinese investors filed between 2016 and 2018. Of covered notices involving Chinese investors, most were in finance (47) and manufacturing (32) from 2019–2021. Only one declaration was filed by a Chinese investor, suggesting that Chinese investors are cognizant that their investments will face greater scrutiny by CFIUS and warrant more laborious notification under the notice process.
In contrast to notices, most declarations were filed by investors from close U.S. allies and partners: Canada (54), Japan (43), and the United Kingdom (33). Similarly, the top foreign acquirers of U.S. critical technologies were Germany (16), the United Kingdom (16), and Japan (15), likely due to these countries being parties to the Wassenaar Agreement and aligned with U.S. export controls. That said, 10 Chinese companies and 5 Russian companies were able to acquire U.S. critical technology companies.
Growth in the number of CFIUS declarations, notices, and investigations could be caused by a variety of factors: expanded CFIUS jurisdiction under FIRRMA, additional committee staffing resources, an increase in global M&A activity, or other reasons. However, these trends indicate a growing awareness in the business and legal communities that the U.S. government will play an active regulatory role at the nexus of cross-border investment and national security.
Q4: What may come next for CFIUS or other investment screening tools?
A4: This year’s report on CFIUS activities underscores the enduring relevance of the committee almost a half century since its formation. Newsworthy data points in this report will likely keep investment screening policy top of mind for Congress as it reviews CFIUS’s budget and authority. Congress will likely pay special attention to this report to evaluate the success of FIRRMA in meeting Congressional objectives, and whether further legislation is required for CFIUS to meet those objectives.
As discussed in a May 2022 report by the CSIS Economics Program, investment screening policies are proliferating across the world. Over the past year, both the United Kingdom and the European Union launched new investment screening mechanisms, deepening transatlantic alignment on economic security. Japan, Australia, South Korea, India, Vietnam, and Indonesia are also considering enhanced economic security policies that could include expanded investment screening regimes. Growth in the role CFIUS plays in inbound investment screening could provide a model for these advanced and emerging economy partners as they weigh the balance between economic openness and national security.
U.S. policymakers are also weighing the creation of a new “outbound CFIUS” or “financial export control” tool for screening certain U.S. investments in countries of concern, mainly China. Introduced by Bob Casey (D-PA) and John Cornyn (R-TX), the National Critical Capabilities Defense Act of 2022 continues to be a contentious proposition. Recent endorsement of the concept of outbound investment screening by U.S. national security adviser Jake Sullivan, as well as the introduction of a Treasury pilot program proposal, suggests potential momentum for the proposal. However, several important questions remain—mainly, if a U.S. government outbound investment screening regime can successfully balance the economic competitiveness of domestic firms engaged in outbound investment with U.S. national security concerns. Many private sector critics claim that an outbound investment screening system would restrain important U.S. investments abroad, thus reducing the competitiveness of key U.S. firms in the short run and U.S. prosperity in the long run. It is also unclear whether U.S. partners and allies would respond to a unilateral U.S. outbound investment screening with regimes of their own, a policy outcome that could constrain foreign direct investment in the United States.
CFIUS’s annual report highlights that in an interconnected international economy increasingly impacted by geopolitical and national security concerns, economic statecraft tools such as investment screening mechanisms will only become more prominent. When mobilizing processes like CFIUS, striking the right balance between promoting economic openness and protecting national security is essential to maintain U.S. prosperity and technological preeminence.
Aidan Arasasingham is a program coordinator and research assistant with the Economics Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Gerard DiPippo is a senior fellow with the CSIS Economics Program.
Julia Fadanelli, CSIS Economics Program research intern, provided valuable research support.
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