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Friday, March 25, 2011

Foreign Investment and National Security: Economic Considerations

James K. Jackson
Specialist in International Trade and Finance

The United States is the largest foreign direct investor in the world and also the largest recipient of foreign direct investment. This dual role means that globalization, or the spread of economic activity by firms across national borders, has become a prominent feature of the U.S. economy and that through direct investment the U.S. economy has become highly enmeshed with the broader global economy. This also means that the United States has important economic, political, and social interests at stake in the development of international policies regarding direct investment. With some exceptions for national security, the United States has established domestic policies that treat foreign investors no less favorably than U.S. firms.

The terrorist attacks on the United States on September 11, 2001, spurred some Members of Congress and others to call for a reexamination of elements of the traditionally open environment in the United States for foreign investment. In particular, some Members argue that greater consideration must be given to the long-term impact of foreign direct investment on the structure and the industrial capacity of the economy and on the ability of the economy to meet the needs of U.S. defense and security interests. In addition, policymakers from a broad group of nations are evaluating their national policies concerning foreign investment within the context of their national security concerns. As a result of these initiatives, Members of Congress may be pressed to address U.S. policies that focus on the role of foreign direct investment more extensively within a broader national security framework.

This report assesses recent international developments as the leaders from a number of nations work to reach a consensus on an informal set of best practices regarding national restrictions on foreign investment for national security purposes. This report also provides one possible approach for assessing the costs and benefits involved in using national policies to direct or to restrict foreign direct investment for national security reasons. Within the United States, there is no consensus yet among Members of Congress or between the Congress and the Administration over a working set of parameters that establishes a functional definition of the national economic security implications of foreign direct investment. In part, this issue reflects differing assessments of the economic impact of foreign investment on the U.S. economy and differing political and philosophical convictions among Members and between the Congress and the Administration.

Date of Report: March 10, 2011
Number of Pages: 27
Order Number: RL34561
Price: $29.95

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