Investing Near the National Security Black Hole

Abstract

Multinational corporations dominate the global economy. Their aggressive business expansion has led to occasional conflicts with some sovereign governments’ core interests. The most irreconcilable one is probably between foreign direct investments by multinationals and the need of sovereign states to safeguard their national security. This article empirically explores the tension in its most manifested case, i.e. the reactions of China-based multinationals to the highly confidential national security review system of the United States, also known as the Committee on Foreign Investment in the United States (CFIUS) review. I find that, contrary to conventional wisdom, most Chinese investors know little about CFIUS and are content to remain ignorant. The majority of those who have some knowledge about it consider the process politicized and non-transparent. A minority reported to have abandoned contemplated investments in the United States due to concerns with CFIUS. Variations in the perception and the reactions of the China-based multinationals generally turn on their government ownership, sectoral sensitivity, and investment size. In addition, the recent landmark decision in Ralls v. CFIUS has a profound impact on the investors’ perception of the system, but has not altered their filing behavior. The findings make several important theoretical and policy contributions.