Section 5: Inward FDI: Benefits, Costs, & National Security Threats

Section 5: Inward FDI: Benefits, Costs, & National Security Threats

“Weekly Guide … Multinational Corporate Investment … Inward FDI (into the US) … Potential Threats … Country Specific Discussions … Conclusion & Looking Ahead”
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Summaries

  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 2. Multinational Corporate Investment > Multinational Corporations Lecture
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 3. Inward FDI (into the US) > Who's Investing Lecture
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 3. Inward FDI (into the US) > Chinese FDI in the US Lecture
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Introducing the Three Threat Framework Lecture
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Denial of Access to Critical Resources Lecture
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Leakage of Sensitive Information Lecture
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Surveillance and Sabotage Lecture
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Applying the Three Threat Framework Lecture
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Guest Lecture: William Plummer on the Challenges of Foreign Multinational Corporations in the IT Industry
  • Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 6. Conclusion & Looking Ahead > Conclusion: Summary

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 2. Multinational Corporate Investment > Multinational Corporations Lecture

  • Now, what you should know is that multinational corporations deliver twice as much, two times as many goods and services, to final consumers as all the trade in the world combined.
  • So for those you may have had some economics courses, which featured trade, trade, trade, trade multinational investment is now a much more powerful force in delivering goods and services.
  • Flows of technology across borders is almost entirely dominated by flows within multinational corporations.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 3. Inward FDI (into the US) > Who’s Investing Lecture

  • Now, are their concerns about foreign direct investment? Well, in a moment we’re going to look at national security concerns from foreign investors taking over American companies.
  • First let us compare the plants, the factories, the operations, of foreign multinationals with their counterparts in the United States.
  • The spillovers to American firms is a large source of productivity gain to American firms.
  • What do I mean by spillovers? Spillovers are technology or management techniques that American firms observe in Siemens or Ericsson.
  • One area of traditional concern has been that foreign multinationals tend to import more than counterpart firms in the United States.
  • So higher numbers of imports means that this helps reinforce the industrial operations the jobs the wages, of their affiliates here in the United States.
  • So we’re happy to see that they have effective supply chains around the world through which they can bring in imports.
  • Today we are focusing on foreign investors coming into the United States, acquiring firms, building plants, creating jobs.
  • What do foreign investors look like? Who are they? How do they compare with other American firms that they encounter here on the ground? Ansell, you’ve been looking into that.
  • Number two, R&D spending, and lastly their import and export dynamic.
  • So as far as wages, people have a great fear that foreign affiliates would only bring low wage, inferior jobs to the United States.
  • Foreign affiliates pay, on average, even more than US multinationals, which are some of the highest paying firms in the world.
  • As far as research and development, foreign firms spend almost as much as US companies when we look at total sales.
  • So lastly when we look at that imports and exports, what we find is that all, or most, firms operating in the United States import more than they export.
  • What we find with foreign affiliates is that they do this even more.
  • Now when we look at firms like Ericsson, Siemens, and Toshiba, this is not something to be worried about.
  • US multinationals operating in Europe also import more than they export.
  • The wages, the R&D spending, and the import, exports, and access to efficient markets, I would say that foreign affiliates actually compare very favorably to US firms.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 3. Inward FDI (into the US) > Chinese FDI in the US Lecture

  • Now what about the controversial area of Chinese direct investment in the United States? Well, shortly we are going to get into the analysis of potential national security threats.
  • When we look at Chinese investors in the United States, when we look at Chinese manufacturing firms, Chinese oil companies, what we find is that they fit the same pattern as other multinationals.
  • I and a colleague here on the Georgetown campus, Lindsay Oldenski, have made some investigations which you will find in your reading list that suggests that Chinese investment in the United States is much lower, not higher, than what one would expect.
  • So our prediction is that Chinese investment in the United States is going to grow dramatically.
  • In general what this will mean is high paying jobs, high R and D activities around the United States.
  • You will see that the door is open to foreign investors including Chinese investors because the states realize that these are good for jobs.
  • Therefore one of our goals in this course, before we come to the end, we’re getting pretty far along, is how to make the United States business friendly for multinational corporations of all types.
  • We want to figure out how to get multinational corporations to keep and build their most valuable operations here within the United States.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Introducing the Three Threat Framework Lecture

  • Now we turn to potential national security threats.
  • When foreign multinationals acquire, takeover, buyout American companies.
  • There are three kinds of threats that have emerged in American experience or European experience or Asian experience.
  • The first is denial of the goods or services previously supplied by the American company that is being taken over.
  • The second kind of threat is leakage of sensitive technology from the American firm that is being acquired to the foreign multinational.
  • Third is the potential for insertion of some kind of a bug, surveillance mechanism, or sabotage mechanism from the foreign multinational into the company that is being acquired in the United States.
  • So should we ever be worried about foreign investors, for example, foreign investors who want to come in and acquire US firms? Is there credible national security implications or threats? James, you’ve been looking at that.
  • So the first threat would be denial of access to critical resources or infrastructure.
  • Could a foreign company actually deny access to oil in a way that would damage the economy? Well the overall supply of oil is so great that even if they shut off access to one refinery or one producer or one field, the overall supply would still be great enough that it would not have a huge impact on the national economy.
  • What happened in the Oregon steel case where a Russian oligarch took over a steel company in the United States? Isn’t steel critical for US defense? There was an example of a Russian steel company that tried to acquire an Oregon based steel company.
  • Thomas, other examples or other worrisome situations from foreign acquisitions of American companies? So, as James mentioned earlier, there are three threats in total.
  • For me, the second threat is important to consider as well.
  • OK. And you said there are three threats? The third threat is the insertion of surveillance or sabotage into the US by, again, an enemy who wants to threaten US national interest.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Denial of Access to Critical Resources Lecture

  • Five years ago a Russian oligarch, through his company called EVRAZ, proposed to take over Oregon Steel, a US owned steel company.
  • The second test is, how concentrated is the industry? Are there many substitutes? Are there many alternatives? And what are the switching costs? How hard is it to substitute one for another? And in the case of Oregon Steel, there were so many other suppliers, there would be a small flap about contracts that could be renegotiated, but no member of the defense industrial base, no member of the civilian industrial base, would suffer more than a very minor inconvenience in shifting to another source of steel.
  • China and the potential acquisition of a US rare earths company.
  • Now, rare earths, what are rare earth’s? If you Google rare earths what you will see is it’s a variety of rather odd chemicals found in nature that are very crucial to different industrial applications and some military applications.
  • For the automobile industry, access to rare earths is vital.
  • For the missile industry, for the aerospace industry, access to rare earths is critical.
  • Right now China has a chokehold over rare earths and has shown that it will withhold, it will deny access to Japan, for example.
  • In some of the disputes over territories near Japan that China and Japan have mutual claims to, China has flexed its muscles by withholding rare earths, which has sent the Japanese automobile industry and the Japanese aerospace industry into a frenzy of anxiety.
  • If the Chinese did propose to take over an American rare earths company, I think the Committee on Foreign Investment in the United States would say the risk of denial is too plausible for us to allow this to take place.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Leakage of Sensitive Information Lecture

  • Threat two, you will recall, is the potential leakage of sensitive products or technologies that might be used by the foreign acquirer in a way that would be detrimental to the interests of the United States.
  • The company is well thought of, but CFIUS, the Committee on Foreign Investment in the United States, wanted to conduct a very careful review of whether or not there were critical military or defense technologies that might be transferred to the Italian parent and then might be sold in the Middle East, in China, in Eastern Europe, in Central Asia, in Russia, in ways that might be detrimental to the United States.
  • The analysis says, are there critical technologies that might be leaked and critical technologies that the Russians, the Chinese, Middle East companies, couldn’t acquire otherwise? Because if they could get it from any other sources, then you would see that there are many supplies, there are many substitutes, and it wouldn’t be helpful to block this acquisition.
  • CFIUS, the Committee on Foreign Investment in the United States, looked at PC technology and went through the same 2-step process.
  • If somebody could deny PC technology to the United States or to the US military, that would be terrible.
  • What about threat two, leakage of technology? Well, PC technology now is commoditized.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Surveillance and Sabotage Lecture

  • Now, we turn to threat three that might be posed by a foreign acquisition of a US company.
  • Now, the prime example in the United States is the case of Dubai Ports World in which a company headquartered in Dubai wanted to take over a British company that operated several US ports including Baltimore, for example.
  • The most important contemporary examples of threat three have to do with foreign companies that want to acquire US IT information technology companies.
  • The fear being that they might supply goods and products that had trap doors, back doors, secret weaknesses so that the whole possibility of cyber security, espionage, surveillance, and maybe even disruption could be inserted into American IT companies like Verizon and AT&T.
  • The problem is that trying to deal with cyber security by singling out companies of a particular nationality, for example, Chinese nationality, doesn’t get very far to protect against penetration.
  • Because if you go to China, you will find that Ericsson, Lucent-Alcatel, Motorola, Hewlett Packard, Cisco, all of the American IT companies- excuse me- all of the world’s IT companies Lucent-Alcatel from France, Ericsson from Sweden, have goods and products that come from China, that come from Israel, that come from Russia.
  • The supply networks for information technology are so globalized that simply singling out potential acquirers of American companies by the nationality of their owners is not going to provide an adequate protection against cyber security issues.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Applying the Three Threat Framework Lecture

  • Well, I have given you this three threat scenario not because we want to be draconian in trying to reject foreign acquisitions, but because the three threat scenario- remember, when we look at the criticalness and then at the number of suppliers, whether the industry is concentrated, whether there are alternative suppliers, substitutes, and low switching costs- means that at the end of the day, there are very few foreign acquisitions that pose genuine, plausible national security threats.
  • So what I am proposing is a common framework to screen for plausible national security threats, screen out implausible national security threats, and allow the process of globalization, of trade, technology, and foreign investment to continue.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 4. Potential Threats > Guest Lecture: William Plummer on the Challenges of Foreign Multinational Corporations in the IT Industry

  • He is now vice president for external affairs for Huawei.
  • Bill, tell us a little bit about Huawei, it’s background, and some of the challenges that it faces here in the United States.
  • It’s interesting when you think that here you have this company, Huawei- which had $46 billion in revenues last year, is working in over 170 markets worldwide, and pretty much responsible for connecting about one third of the world’s population- that is largely unknown in the United States.
  • We also have another challenge, and that of course is that the company was founded 27 years ago in China.
  • It’s a private company, which is not so unusual today, but was very unusual 1987.
  • So the concern would be that by virtue of the company having a headquarters and a heritage in China, that the company would somehow be more susceptible to penetration or compromise by the Chinese government.
  • Whether you’re Huawei, headquartered and heritaged in China, or Ericsson in Sweden, or Nokia in Finland, or Cisco in the US, you’re all transnational companies.
  • I think as we’ve learned over the last couple of years of revelations here in the US, it doesn’t matter where a company is headquartered, if the government wants to compromise them, as we’ve seen has happened in the wake of everything we’ve learned from Edward Snowden.
  • So when you go to headquarters of Huawei in Shenzhen, I presume other companies are right in the same place? Yeah.
  • We have over a dozen offices in the US. So all these companies are actually quite similar, regardless of the market.
  • Tell me, how would the United States benefit if there were a greater Huawei presence here.
  • There are the short term, and then there are sort of the longer term that get a little bit more esoteric.
  • I look at- for instance, Huawei again deployed across 170 markets.
  • We’ve opened a financial center of excellence in London, and we have a new design center of excellence in Paris, and we have R&D centers within the last couple of years opened in Ireland, and then near and dear to my heart, Helsinki.
  • Our procurements from European suppliers have climbed to $4.5 billion a year, and European consumers are paying one third what Americans are for wireless broadband.
  • So the benefits to the US- the obvious things, more jobs, more investment, those billions could be coming here.
  • More co-innovation, which is very important these days.
  • That’s a reflection again of the market environment being more favorable.
  • More jobs, more investment, more co-innovation, more affordable broadband, more ubiquitous broadband.
  • Huawei for instance has- Describe what the concept is of the- That today, we’ve got a handful of billions of human beings that are connected.
  • By the year 2025, Huawei estimates that will be 100 billion-plus connections to the Internet.
  • So the additional and longer term benefit to the US is if we’re going to realize all of the commercial and lifestyle promise and benefit of the internet of things, it means that companies like Huawei have to be allowed to compete and the competitive market has to be vibrant.
  • What is it like for you to work in this large and rapidly growing Chinese-based company? It’s an experience.
  • I hadn’t had experience with Chinese companies in the past.
  • To see where we’ve come in the 5 and 1/2 years I’ve been here- Really, when I started here, there wasn’t a lot of focus on branding or communications or external stakeholder relations with government, or analysts, or media.
  • I mean, it’s been amazing to be a part of a company that has grown, matured into a legitimate multinational leader in the industry.
  • If there were any time to have join this company, the last five years has been great fun.
  • This probably will be more of an educational experience for our MOOC participants from the United States, because many of our MOOC participants come from Africa, Latin America, and Asia, and Europe, where they’re likely to be much more familiar with Huawei.

Inward FDI: Benefits, Costs, & National Security Threats (Week 5) > 6. Conclusion & Looking Ahead > Conclusion: Summary

  • So we have moved from focusing on trade, investment, and technology this week to highlighting the importance of multinational corporations, of direct investors in the United States.
  • We have focused on the United States, but we should notice that the companies we are talking about are multinationals from Europe, from Asia, Korea, and Japan, and then special cases of multinationals from China, India, Russia, et cetera.
  • What we discovered first of all is the extraordinary benefits, direct benefits to workers, to communities, to R&D in host country, in this case, the United States so that foreign investors bring good jobs and highly dynamic activity into the United States.
  • Then we turned to the potential national security threats of delay or denial of technology, of leakage of critical technologies that might be used in ways detrimental to the United States or of the possibility for insertion of espionage and infiltration into American companies via foreign acquisitions.

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