Foreign Direct Investment and US Policy

What Foreign Direct Investment Is and Why It Matters

Foreign direct investment (FDI) represents cross-border capital flows where an investor in one country establishes a lasting interest and significant degree of influence over an enterprise in another country. The International Monetary Fund defines "lasting interest" as ownership of at least 10% of voting shares, distinguishing FDI from portfolio investment where investors hold smaller, passive stakes.

FDI takes two primary forms. Greenfield investment involves building new facilities from the ground up, such as a Japanese automaker constructing a manufacturing plant in Tennessee. Mergers and acquisitions (M&A) involve purchasing existing enterprises, such as a European pharmaceutical company acquiring a US biotech firm. Each form carries different implications for employment, technology transfer, and national security considerations.

The US has historically been both the largest recipient and source of FDI globally. According to Bureau of Economic Analysis data, the cumulative stock of foreign direct investment in the United States reached approximately $5.25 trillion by 2023, while US direct investment abroad stood at roughly $6.64 trillion. These figures represent decades of accumulated cross-border capital flows and reflect the deep integration of the US economy with global markets.

Key Drivers of FDI Flows

Several factors determine where multinational corporations choose to invest directly.

Market access remains the primary motivation for most FDI. Companies invest in foreign markets to serve local customers, avoid trade barriers, and respond more quickly to local demand. The size and growth rate of the destination market matter significantly. The US attracts substantial inbound FDI partly because it represents the world's largest consumer market with GDP exceeding $27 trillion.

Cost considerations drive FDI seeking lower labor costs, favorable tax treatment, or proximity to raw materials. While the US rarely competes on labor costs, it attracts investment through skilled workforce availability, infrastructure quality, and increasingly through state-level tax incentives. The CHIPS Act semiconductor incentives, for example, attracted over $200 billion in announced manufacturing investments between 2022 and 2024.

Technology and capabilities motivate FDI when investors seek access to specialized knowledge, research infrastructure, or skilled talent pools. Silicon Valley, Boston's biotech corridor, and research universities nationwide attract foreign investors seeking innovation capabilities unavailable elsewhere.

Currency and financial conditions influence FDI timing and volume. A weaker dollar makes US assets relatively cheaper for foreign acquirers, potentially accelerating inbound M&A. Interest rate differentials and capital availability also affect financing costs for cross-border transactions.

CFIUS and National Security Screening

The Committee on Foreign Investment in the United States (CFIUS) reviews foreign acquisitions and investments that could affect national security. Originally established in 1975, CFIUS gained expanded authority through the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018.

CFIUS is an interagency committee chaired by the Treasury Department and includes representatives from Defense, State, Commerce, Homeland Security, and other agencies. The committee reviews transactions to identify potential national security risks, including access to sensitive personal data, proximity to military installations, critical technology exposure, and supply chain vulnerabilities.

Mandatory filing requirements apply to certain transactions involving critical technologies, critical infrastructure, or sensitive personal data of US citizens. Transactions involving foreign government-controlled entities face heightened scrutiny. Penalties for failing to file required notifications can reach the value of the transaction.

Review timelines typically span 45 days for initial review, with an additional 45-day investigation period if concerns arise. CFIUS can approve transactions unconditionally, approve with mitigation conditions, or recommend that the President block the transaction. Between 2018 and 2022, CFIUS reviewed over 1,500 transactions, with only a small percentage blocked outright but many withdrawn by parties anticipating negative outcomes.

Mitigation agreements have become increasingly common. These agreements may require companies to establish separate boards for US operations, restrict access to certain facilities or data, divest specific business units, or accept ongoing compliance monitoring. Such conditions effectively reshape transaction structures and post-acquisition operations.

Sector Implications for Investors

FDI patterns and policy constraints vary significantly across sectors, creating different risk and opportunity profiles for investors.

Technology and semiconductors face the most intensive scrutiny. CFIUS has expanded its focus on artificial intelligence, quantum computing, biotechnology, and advanced semiconductors. Chinese investment in US technology companies has declined sharply since 2017, falling from over $29 billion annually to under $2 billion by 2023. Investors in technology companies should assess whether foreign ownership changes could trigger CFIUS review and affect deal certainty or valuation.

Critical infrastructure including ports, energy assets, telecommunications networks, and water systems faces elevated review standards. The 2006 controversy over Dubai Ports World's acquisition of US port operations established political precedents that continue influencing policy. More recently, Chinese-linked ownership of agricultural land near military installations has attracted Congressional attention.

Financial services generally face less restrictive FDI treatment, though foreign bank acquisitions require Federal Reserve approval and insurance acquisitions require state regulatory approval. Cross-border investment in US financial services continues with relatively few CFIUS interventions.

Real estate near sensitive facilities has gained increased CFIUS attention. The committee can review real estate transactions within defined distances of military installations, even without underlying business operations. Several states have enacted additional restrictions on foreign ownership of agricultural land.

Healthcare and pharmaceuticals have seen continued cross-border M&A activity, though transactions involving drug manufacturing capabilities, personal health data, or biotechnology innovations may face national security review.

Sample FDI Flow Figures

Understanding historical FDI patterns provides context for evaluating current trends and policy impacts.

Annual flows fluctuate significantly based on large transactions, economic conditions, and policy environment. The 2020 decline in inbound FDI reflected pandemic uncertainty, while the subsequent recovery included substantial manufacturing investment announcements.

By source country, Japan, Canada, United Kingdom, Germany, and the Netherlands historically represent the largest sources of FDI into the United States. Chinese FDI, which peaked around $46 billion in 2016, has declined substantially due to both US policy restrictions and Chinese capital controls.

Monitoring Checklist for Investors

Investors with exposure to companies involved in cross-border transactions or operating in sensitive sectors should track FDI-related developments.

Regulatory announcements to monitor include:

• CFIUS enforcement actions and policy guidance
• Treasury Department updates on mandatory filing requirements
• Congressional hearings on foreign investment restrictions
• State-level legislation affecting foreign ownership

Company-specific factors to assess:

• Foreign ownership percentage and trends
• Government contract exposure and facility security clearances
• Critical technology designations affecting products or capabilities
• Geographic proximity of facilities to sensitive installations

Transaction risk indicators:

• Acquirer country of origin and government ties
• Target company's technology, data, or infrastructure characteristics
• Similar transactions previously reviewed or blocked by CFIUS
• Timeline assumptions for regulatory approval processes

Data sources for ongoing monitoring:

• Bureau of Economic Analysis FDI statistics (quarterly and annual)
• Treasury CFIUS public reports (annual)
• Trade publication coverage of deal activity by sector
• Company disclosure of CFIUS filings or mitigation agreements

Practical Takeaways

FDI policy increasingly affects investment analysis across multiple dimensions. For investors in potential acquisition targets, foreign buyer interest may support valuations but also introduce regulatory approval uncertainty. CFIUS review can extend deal timelines, impose operational constraints through mitigation agreements, or ultimately block transactions.

For investors in companies with significant foreign ownership, policy changes may affect governance structures, business operations, or even forced divestiture requirements. Monitoring ownership disclosures and regulatory developments helps anticipate potential impacts.

For investors tracking sectoral trends, FDI announcements signal foreign capital's assessment of US competitiveness in specific industries. The wave of semiconductor manufacturing announcements following CHIPS Act passage, for example, reflects both policy incentives and strategic repositioning of global supply chains.

Understanding the interplay between cross-border capital flows and evolving national security policy has become essential for evaluating investment opportunities with international dimensions.