Outbound Investment Restrictions

Session 27 of the Congressional Study Group

Editor's note:

The following is a summary of the 27th session of the Congressional Study Group on Foreign Relations and National Security, a program for congressional staff focused on critically engaging the legal and policy factors that define the role that Congress plays in various aspects of U.S. foreign relations and national security policy.

On April 6, 2023, the Congressional Study Group on Foreign Relations and National Security convened over Zoom to discuss proposals to adopt outbound investment restrictions – often called “reverse CFIUS” because of its similarities to the Committee on Foreign Investment in the United States (“CFIUS”) process for inbound foreign investment. 

Both Congress and the executive branch have been actively debating the possibility of imposing a legal regime for regulating outbound foreign investment on national security grounds. Earlier this month, both the Commerce and Treasury Departments released reports (pursuant to a legislative mandate) sketching out measures the Biden administration could pursue. Members of Congress have also put forward several legislative proposals. 

The presenters at the April 6 event were: 

  • Sarah Bauerle-Danzman, a professor at the Hamilton Lugar School of Global and International Studies at the Indiana University Bloomington, who previously worked on CFIUS matters in the Office of Investment Affairs at the U.S. Department of State; 
  • Kevin Wolf, a partner at the law firm Akin Gump who previously served as the Assistant Secretary of Commerce for Export Administration; 
  • Laura Black, a senior counsel at the law firm Akin Gump who previously served as the Director of Policy and International Relations for the Committee on Foreign Investment in the United States (CFIUS) in the Treasury Department’s Office of Investment Security; and 
  • Inu Manak, a fellow in trade policy at the Council of Foreign Relations who has written widely on the subject. 

Prior to the discussion, the Study Group received the following background readings: 

The presenters began the event with a discussion of why outbound investment is a topic of conversation in policy circles. With regard to China, the presenters described concerns that simply excluding firms with direct ties to the Chinese military may be inadequate when boundaries between the Chinese state and Chinese businesses are different from those in the United States. Capital and know-how also contribute to a technological ecosystem abroad that could make it possible for foreign countries to develop indigenous capabilities that are not dependent on the United States, the presenters said. They also described other policy concerns, such as human rights abuses, and re-shoring of American supply chains. 

The presenters identified four types of investment activities as potential concerns: 

  1. U.S. multinational firms establishing production in China as platforms for export or to serve local markets; 
  2. Multinational firms entering joint ventures or other partnerships with Chinese companies for research and development or joint innovation projects. Research and development in some sectors is so capital intensive, the presenters said, that firms need to pool resources to reach innovation frontiers. The presenters observed that some firms are forced to participate in these arrangements if they want a good relationship with the Chinese government; 
  3. Venture capital can be the frontier of technological change, and, the presenters said, it can bring with it other intangible goods, like a stamp of approval, coaching, networks, and lessons on scaling companies; and 
  4. Portfolio flows that lack other aspects of an investment that might matter for reverse-CFIUS purposes. The presenters questioned whether pure monetary investment was an issue of key national security concern for the United States. 

The presenters observed that even a small amount of investment into breakout technology can make a meaningful difference. They said that while the classical practice was to restrict outbound technology via export controls, concerns emerged related to the use of commercial technology to achieve strategic economic dominance in key sectors. 

The presenters described policy goals for outbound investment restrictions, including preventing proliferation of dangerous technology, and preventing use of U.S. assets to develop indigenous innovation ecosystems. They also described existing attempts to address this space, including the National Critical Capabilities and Defense Act (NCCDA) proposed by Senators Casey and Cornyn in the previous Congress, and a pending executive order. The NCCDA, the presenters said, led to debate about the scope of outbound investment restrictions. That process, they said, led to discussion about the pending executive order which they expect to be narrower in scope than the NCCDA and focused on notifications rather than screenings of investments. Other policy approaches described by the presenters include clawback provisions attached to incentives provided in legislation, and enhanced reporting requirements via the Securities and Exchange Commission. 

Presenters described challenges associated with outbound investment restrictions, including the ease with which parties can shift investment and the challenges of monitoring compliance; the importance of multilateralism and the potential to create competitiveness issues if other countries do not adopt restrictions for their own firms that are like those adopted by the United States; the bureaucratic staffing challenges associated with an reverse-CFIUS program; defining the scope of reverse-CFIUS restrictions and processes for challenging the restrictions and other guardrails; and the potential to lead China to double down on indigenous innovation in the face of pressure on investment. 

A question-and-answer session followed the initial presentation. Topics of discussion included administrability of a restriction program, tradeoffs of statute-based or executive action; and enforceability of a restriction program. 

Visit the Congressional Study Group on Foreign Relations and National Security landing page to access notes and information on other sessions.