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Global FDI Policy : Correcting a Protectionist Drift [Rush Transcript; Federal News Service]

Speakers: Matthew J. Slaughter, Professor, Dartmouth University, Adjunct Senior Fellow for Business and Globalization, Council on Foreign Relations, and David M. Marchick, Managing Director for Global Government and Regulatory Affairs, Carlyle Group
Presider: David Wessel, Economics Editor, The Wall Street Journal
June 26, 2008
Council on Foreign Relations


DAVID WESSEL:  (In progress) -- Marchick, who's now the head of Global Regulatory Affairs at Carlyle and before that, practiced international law at Covington & Burling.

And as you may know, the format for these things is clever, but rigid.  And so I'm going to ask these guys some questions till about 9:00 or so and then we're going to open it up for questions and we'll leave at 9:30. 

I'm thinking that the only definition that I want to put on the record -- and I thank them for doing it so well in the first footnotes of the report -- is when we talk about foreign direct investment, we mean or they mean something very specific.  They mean not when the Chinese Foreign Reserve Agency buys U.S. Treasury bonds, but when somebody buys a big chunk of a company in another country.  "An individual purchasing one share of British Telecom" -- they write -- "would constitute a portfolio investment.  That's not what we're talking about.  An individual purchasing all the share of British Telecom would constitute foreign-direct investment." 

Foreign-direct investment describes ownership of companies only.  Portfolio investment denotes a much wider class of assets, securities and stuff.  Foreign-direct investment comes when a foreign firm buys an entire firm in another country, a big chunk of a firm or, of course, opens a factory or builds a building or whatever.

So Matt, let me start with you.  And why don't you offer -- explain to us why it is that you think that foreign-direct investment is so economically important both to the companies and the countries that are involved?

MATTHEW SLAUGHTER:  Great question!  I think -- so if you ask an economist like me how you measure the economic performance of any country, there's a lot of dimensions you could look at, but the single biggest one is the productivity performance for the country -- in the aggregate, kind of meaning output per worker in a country.

And one of the things that we know from lots of scholarship academics have done from a lot of industry studies and company studies -- like a lot of you in this room probably know this firsthand -- is the really good companies that drive productivity performance in countries are the globally engaged companies, and especially the multinational firms.  So that's why foreign-direct investment is so important.

We have a lot of good data on this for the United States, for example.  So if you look at the United States, the firms that are part of a multinational -- either that are part of the U.S., parents of U.S. headquarter multinationals, or the in-sourcing companies, the U.S. affiliates of foreign multinationals -- they tend to be a lot more capital intensive.  They do a lot more research and development.  They invest a lot more in their people.  And the bottom of that is it shows up in paychecks.  So the paychecks for people who work at multinational companies tend to be -- in the U.S. the premium's 25 to 35 percent over the past generation relative to the rest of the workers in the private sector. 

And you see that again and again in almost every other country on the planet in which we have data -- even middle and low-income countries.

WESSEL:  But that seems to tell me that I'm better off working at GE than the corner hardware store.  Why does that tell me that I should allow Daimler to buy Chrysler?

SLAUGHTER:  Because the overwhelmingly predominate way that these multinational firms establish and expand operations around the world is through these purchases.  It's M&A transactions.

So we see -- I think a lot of us have seen when there's what economists and the policymakers would call green field investment -- when a firm, they go out and they build a brand new plant and there's a ceremony and they cut ribbon and they have their shovels and turn over the dirt -- that happens a lot, but when you look at the aggregate data for the U.S. -- again, where we get good data -- in the past generation, 89 percent of all the new foreign-direct investment over that generation that came into the U.S. was through these cross-border purchases, these M&A transactions.

So part of the reason David and I really wanted to work on this was if you care about FDI -- and I think we all should again, from this big of how's the economy doing, how's the earnings power of citizens -- if you care about FDI, you really care about cross-border M&A transactions.

WESSEL:  Okay.  So if it's such a good thing, what's the problem?

DAVID MARCHICK:  Well, I think the problem is that the politics of FDI has changed significantly.  The types of FDI we're receiving and other countries are receiving is changing.  And just like we've seen in previous cycles -- whether it was the 1980s with Japan, the 1970s with a number of Arab countries or even going back the 1910s, 1920s with then the U.K. -- the U.S. was very worried about U.K. British dominance, because folks in the Defense Department, in their wisdom, said that our next war is going to be with the Brits, because they dominate in the air and the sea. 

The dynamics with FDI are changing, thankfully.  So a few examples:  Traditionally, FDI in the United States has come from the U.K., Canada, the Netherlands, Japan, a few other major industrialized countries.  That's changing the flow, as opposed to the stock of FDI, the flow from call it "new emerging" economies has grown significantly.  So outward investment, for example, from Russia has increased about five times -- fivefold in the last five years.  Outward investment from China has increased six fold.  Outward investment from a number of Middle Eastern countries, including the UAE, has grown between 30 and 40 times.  So that's why.  So we're seeing new sources of capital, which makes people uncomfortable.

Second is that if you look at the companies that are multinationals in these countries, they're more likely, than if they came from the U.K., Canada, Japan or our traditional source of investment, to be government affiliated.  Okay, so if you look at the top 100 multinational companies in the world, only five are government owned.  The basically big oil companies, plus Singapore Sing Tel.

If you look at the top 100 multinational companies in the developing world, 25 percent of them are government owned.  And so just because of the way those economies have developed, because of their structures, you're more likely to have government ownership of the big companies that are able to make significant investments in the United States from those countries.

And the third reason, I think, is that the investments are flowing to more sensitive assets.  So the U.S. opened up the telecommunications system in the '96-'97 period.  A couple of years later, you had Deutsche Telekom buying a big wireless company in the United States.  You're seeing the same thing -- global crossing was a big investment.  You're seeing, courts, obviously, as an issue.  In Indiana -- just ask Mitch Daniels how popular it is to sell a toll road to a Spanish company.  It's hard to see how a Spanish company is going to wreck a toll road, but he may lose his election over that.

And so the politics of these various forces have become much more difficult and it's happening around the world as well.

WESSEL:  Okay, but there are a lot of things we could worry about.  I haven't noticed that there's any absence of foreign-direct investment.  I mean, the last time I checked, we seemed to be selling off big chunks of Wall Street to foreign investors every day.  In fact, we'd like to get a few more.

There's been a lot of controversy over a number of deals -- Dubai Ports, of course, and the 3Com deal, but there have been a number of other deals that have gone through. 

So are you sure this is something we need to worry about now?



SLAUGHTER:  Two reasons:  One is -- and this is I think why in the title we call it a protectionist drift.  And I think drift is an important noun.

One is, you know, when David and I look at the data, we think you already see an impact in the quantity and quality of FDI transactions over these rising barriers.  So you know, last year -- so globally, you see these M&A cycles and booms.  And as a lot of you know, there's been a real uptick in M&A activity in recent years.

So it's not like the issues we're talking about in this report have just been cutting off all M&A activity around the world.  That's definitely not the case.  But when you look in particular industries, like the sensitive ones Dave mentioned, you see that it does have an impact on transactions in particular sectors.  And even for transactions that go through, we're seeing that they're taking a lot longer to have the deals happen the more restraints and restrictions are placed on them in the U.S.  They tend to be called mitigation agreements to the CFIUS agreement.

So sometimes the quality of the FDI transactions are a lot more constrained and a lot more hampered than they used to be.  So it's not just kind the aggregate FDI flows that matter, but especially from a productivity perspective, it's really the ability of these companies to undertake timely, well-structured transactions.

So we're seeing it already in the data.  And I think the second reason we worry and want to use this drift metaphor is, boy, you know, there might not be a lot of activity today, but the set of countries that we talked about in the report -- you look at Germany, you look at Canada, you look at Russia -- a lot of countries are moving in the direction of now not just blocking high-profile transactions, but changing the laws and the implementation of their laws.

And so if this were to go on, this sort of drift for another one, two, three, four years, then we may be in a very different environment in terms of how constrained these key companies are.

MARCHICK:  Let me just add to that, if I can, because I think there's some very interesting data.

And again, I think we start with the proposition that FDI is good.  We want FDI.  Other countries want FDI as a positive force for the global economy and for the U.S. economy.

Second, that governments do have legitimate interests not only to protect their own national security, but also to protect other important government interests -- competition policy, labor policy, et cetera.

But unless there's a strong government interest in FDI transactions, government should stay out of the way, okay?  But what you're seeing not only in the United States, but also around the world, is more government oversight, more government involvement in FDI.  And that, in our view, is bad.  I'll just give you a few data points:

Take the United States, okay?  One would think that after September 11th, the number of CFIUS cases and the rigor with which CFIUS scrutinized transactions -- CFIUS is this Committee on Foreign Investment in the United States.  It's the body that reviews foreign investment in the United States for national security issues.  One would have thought they would have spiked after September 11th.  Actually, it went down, okay?

After Dubai Ports, it went up.  September 11th was a national security event.  Dubai Ports was a political event, okay?  So the bureaucracy basically reacted to the politics of it and cramped down -- not because people were saying we're really worried about these transactions all the sudden from a national security perspective, but because, in my view, they're worried about saying, congratulations, boss.  You're going up to the Hill today to testify on why you approved this transaction.  Not -- you know, Vin Weber used to drill people when he was on the Hill -- not a very pleasant experience.

WESSEL:  Let me just add -- I thought one of your points -- and it was a good one -- was that the inadequacy of the transparency of CFIUS and the fact that people weren't notified meant that it created a climate that led them to ratchet up.  So if CFIUS had been better managed and had --

MARCHICK:  Agreed.

WESSEL:  -- the lines of communication been better, we might not have seen the reaction.

MARCHICK:  Agreed.  For example, CFIUS was supposed to issue a quadrennial report to Congress every four years.  I think they did it once and then didn't do it.  So you know, those type of things don't tend to make members of Congress very happy.

But if you look at the data, for example, the number of cases in 2005 that went through CFIUS -- 65 percent -- 65 cases; the number of investigations two; the number of withdrawal, basically means promised transactions, two.  Okay, the next year, basically Dubai Ports happened in February:  113, seven investigations, five withdrawals.  The next year:  147, six investigations, six withdrawals.  The number of mitigation agreements that Matt mentioned, there were 27 mitigation agreements --

WESSEL:  A mitigation agreement is?

MARCHICK:  Is a condition that the government imposes in exchange for approval.

There were 27 in 2006 and seven -- there were 13 in the previous three years.  So you see that basically, as a result of the Congress -- the congressional reaction -- the bureaucracy, you know, cramped down.  I would have probably done the same thing if I were bureaucracy.

This year, FDI is down by 40 percent.

WESSEL:  From a very high level.

MARCHICK:  Yeah, from a high level, but not as high as 2000.  No, it's down 40 percent from last year.

WESSEL:  Right.  2007 was pretty big.

MARCHICK:  2007 was big, but not as big as 2000.

We're on pace for 160 transactions to go through CFIUS.  So even though you have a 40 percent drop, you're still seeing the number of cases go up, okay?  More government involvement and you're seeing the same thing around the world.

One other data point:  UNCTAD -- the U.N. Committee for Trade and Development.  (Laughter.)

SLAUGHTER:  Trade and development.

MARCHICK:  Always a good thing to remember --

WESSEL:  There's a quiz after -- of the panelists.

MARCHICK:  This goes to Matt's drift point.  We're not in a crisis.  We're going in the wrong direction.  They track the favorable and unfavorable policy actions around the world for investment liberalization.

Okay, so basically, if we open up our telecom market, that's a favorable policy action.  2000 -- in the year 2000, there were 150 favorable policy actions, three unfavorable; 2005, 164 favorable, 41 unfavorable.  Okay, so basically, the favorable stayed the same, the unfavorable shot up -- and 2006, basically the same thing -- 147 and 37.

So again, we're not in a crisis.  Our economy's not going to collapse because of lack of FDI, but the trends are going in the wrong direction and that's what troubles us.

SLAUGHTER:  Can I just jump in with one more thing, David?

WESSEL:  Please.

SLAUGHTER:  The other thing I will say why I think it's important to think about this is -- and you touched upon this -- which is we still have this big pattern of global imbalances out there.  The U.S., you know, in 2006 ran an $811 billion current account deficit.  Last year it came down to about $740 billion. 

But again, that means on net we've got to sell that much in assets to the rest of the world.  And our ability to smoothly finance that current account deficit without having -- often times it gets called a disorderly adjustment in the value of the dollar or the value of other prices.  It depends a lot on, in some sense, the net confidence of the rest of the world in their desire to buy that much on net of our assets.

And for a lot of years, in the past generation where the U.S. has been running these ever larger current account deficits, FDI transactions have been a big chunk of one of the assets that the rest of the world is able to buy into.

WESSEL:  Right.  And the general argument is that's more stable, because you can't pull it out in 15 minutes.

SLAUGHTER:  Yeah.  So as a lot of us know, firms tend to have very long time horizons when they undertake these M&A transactions.  You know, they're thinking many years out.  So that tends to be a really stable form of capital, as opposed to these portfolio investments or Treasury securities or equities where you can buy and sell them much more quickly.

WESSEL:  David, let me ask you:  So let's look -- at the end of the report you offer a number of guidelines for governments that are thinking about doing this.  And some of them, I think, are pretty not controversial -- to say that the process ought to be confidential and that you ought to have some time line so you know you're not going to be hung up for 14 years on an approval.

But I think your basic point, the most fundamental one, is that governments should limit their review mainly to national security things, and not look at economics.  Well, in that context -- and I think the logic for that is obvious that government should have the power to protect and national security should trump economics, but you get into temptations to protectionism and to favor vested interests once you start saying, is this a good or bad investment?

But let me ask you about the special case of sovereign wealth funds.  On one hand, this is just another form of foreign direct investment.  And as you point out, if we're going to be getting money from the people who have money, we have to accept that they have -- state-owned enterprises and funds have a larger share of their wealth, so we're going to have to sell it for them.  That's one thing.

But on the other hand, we in the U.S. and the U.K. and so forth have spent a generation de-nationalizing our economies and letting the markets go.  And Larry Summers, for instance, has made the point like there's something a little bit unsettling about saying we don't want the U.S. government to own anything in the commercial sector, but we're willing to sell it to the democratic sovereign wealth fund of say, Saudi Arabia or the UAE.

So how do you look at the sovereign wealth funds, and particularly, how can you say that we should take that into consideration when we're looking at whether their investments are welcome?

MARCHICK:  Okay, very good question.

General proposition I think Matt and I would agree with:  U.S. policy should favor private source of capital.  We basically believe that private sector decisions are more efficient, more economical, more rational.

And in some of our trade agreements, like the Singapore FTA, we have articulated that policy by encouraging the Singapore government, for example, to privatize certain of their assets.  I think that's very appropriate.

At the same time, we do have lots of essential equivalent entities in the United States -- they're not called sovereign wealth fund, but they're functionally equivalent in that they are pools of capital managed by the government.  It's not just pension funds, but in Wyoming and Alaska and New Mexico, there are funds that -- funds that basically draw money from sales of natural resources and give payments to their citizens.  So you know, there was a great cartoon -- I forget what newspaper -- but basically, it has someone driving into Alaska and the sign says, "Welcome to Alaska.  Here's your $1,000 check for letting us spoil the environment."  So Alaska basically generates huge amounts of wealth from oil and they give it to their citizens.

Simultaneously, other countries are -- they basically have federal pools of savings, which they invest.  Now, would it be better if they were private pools of savings?  Yes, but they're public pools.  And then the question is:  Do we want that money to come to the United States or not.

WESSEL:  Well, I think the question is whether -- most of those funds are portfolio investors.  They're not buying whole companies.

MARCHICK:  Correct.

WESSEL:  And in some cases, we don't even allow them to be portfolio -- we don't allow the Social Security Trust Fund to buy private equities.  So why should we allow the social security trust fund of some other country to buy up an entire airline, or -- well, I guess we don't allow airlines --

some other thing? 


WESSEL:  We might be better off if we let them run our airlines.  (Laughter.)  We don't seem to do that very well.

SLAUGHTER:  In fact, I think we ought to sell them all! 

MARCHICK:  Singapore Airlines, which is government owned, does a pretty good job.

Because it's in our national interest to do so; because FDI benefits the United States for all the reasons Matt articulate.  And it's better to have that money come here than go elsewhere.

WESSEL:  So what would you do about the sovereign wealth funds?  Are they just like any private investor?

SLAUGHTER:  I'd say a couple things.  One is -- to build on what Dave said -- one is, a lot of these sovereign wealth funds:  It makes sense that there are governments managing these revenues that come in.  I mean, they've got legitimate public policy concerns of wanting to either redistribute income today or to redistribute it over time to future generations.

So what a lot of these natural resource funds exist to do is, countries like Norway have said, look, we've got this finite resource.  It's a great boon to us as a country, but we'd like to share that with future generations.  I mean, by definition, it should be governments that manage those revenues for future generations.  That's one thing.

And the second thing on your question is:  We've got set of market institutions in place in this country whereby if one company, whether it's foreign or domestic, public affiliated or privately affiliated wants to make a tender offer for the equities of another company, they can make that bid.  And we're seeing this play out, you know, in the U.S. today with Anheuser-Busch and if -- take an airline.  Take a struggling U.S. airline -- you can find a few.  If some foreign actor comes along and can convince the shareholders we can manage the company better and create more value --

WESSEL:  Yeah, but that's not the issue.  The issue is:  Are these sovereign wealth funds run like private entities, or are they effectively arms of their government?  The Russian and Chinese governments have not exactly established themselves as the great proponents of free market capitalism. 

So do you think the U.S. government should distinguish in anyway between sovereign wealth funds and other investors?

SLAUGHTER:  We allow the CFIUS process in the U.S. to make that determination.

So what I find confident for our country -- and this is part of what we try to speak about in offering recommendations in the report to other countries -- is you can have that kind of review mechanism and there's good reasons to have that concern, right?  The principle of a government-affiliated foreign business that might use its commercial activities to try to pursue national security concerns that might conflict with ours -- we can't rule that out.  But given that, we have the set of recommendations that says, okay, have a review mechanism to focus on national security concerns.  Have it be transparent.  Have it be timely.  And also, for any given country, we try to argue there's not value in trying to drop this ex-ante list of say, by the way, nobody can touch roads or airplanes or that sort of thing.

WESSEL:  David, you mentioned the politics of this.  And it seems to me that the resistance to foreign-direct investment is not limited to whatever the specific concerns are about foreign-direct investment, but is instead a manifestation of a lot, you know, a lot of public anxiety about globalization broadly defined.  It turns out that in a democracy if the public's worried about something, the politicians tend to listen.

So apart from the guidelines for foreign-direct investments, what would you recommend that Senator Obama or Senator McCain think about as a way to make the public feel more comfortable with globalization, given that it has benefits, but as we know, some costs and risks?

MARCHICK:  I think that the first thing they should do is send the report that we wrote to every citizen of the United States.  (Laughter.)  And mandate that they read it.

WESSEL:  Thereby creating a gigantic foreign carbon footprint.  (Laughter.)

MARCHICK:  They could do it electronically.

SLAUGHTER:  They'll e-mail it!

MARCHICK:  I think that, ironically, the politics in the United States is getting better on FDI and not worse.  I think we saw the low point with Dubai Ports, but after that, every member of Congress heard from folks in their district that basically, you know, I work for Airbus; I work for Sony; I work for Ben & Jerry's.  You know, these are good jobs.

And I think the politics has shifted on the Hill quite a bit, because there's been so much activity and so much engagement by foreign-owned companies.  You know, in my view, the hero of the whole thing is Barney Frank.

Barney Frank, when he was on minority, basically convinced the Democratic leadership not to politicize the CFIUS reform bill.  Oxley and others, Blunt, came up with a good bill.  Some on the Democratic side basically wanted to make this another issue, another Dubai Port.  He shut it down.  Then when he became chairman, he put together a good bill.  And now he's basically having hearings saying, you know, we need more investment.  And it's, you know, more than anybody else he's changed the politics on the Hill.

WESSEL:  All right.  So David took my question and narrowed it.  I know you won't, because you've talked about this.

What would you do to make the public more comfortable with the risks of globalization so we don't lose the benefits?

SLAUGHTER:  Start by making sure everybody understands how broad and deep those benefits actually are.  That'd be one thing.  I mean, again, when you bring it down to the level of -- and economists aren't as good at this -- but about kind of good jobs and good wages.  All the different things that international trade and investment and immigration -- don't leave that out -- that they have done and have the potential to do for the U.S. economy is really big.  I mean, we're talking about hundreds and hundreds of billions of dollars every year and national income that's higher, thanks to all these things.

And then second, have a real candid and open discussion about the fact that, yeah, not every worker and firm and community directly enjoy these gains.  And given what we've seen with income growth or lack thereof for the majority of Americans in recent years, that's a real issue. 

And then try to think about a policy mix that allows you to open borders even more to continually enjoy aggregate gains, but think about mechanisms for trying to share those gains more broadly.

WESSEL: So elaborate:  When you say "mechanism to share those gains more broadly", what do you mean?

SLAUGHTER:  So we've got a tax code in the U.S. that you could think about making more progressive, all right -- if you want to address these long-term kind of income pressures.  And I've got some thoughts on that.  And then you can also think about the transition issues, because we know one of the ways we get all these dynamic gains from all these forms of global engagement is because we've got such deep and open markets, and especially the labor markets, where there's just -- every hour that America's open for business, 25,000 jobs get destroyed.  About that many get created, but there's this astonishing churn that goes in the U.S. labor market, and that generates a lot of concern.  There's a lot of anxiety and a lot of real economic pressures.  And I think we could broaden the kind of nature of supports that we have for labor market transitions.

WESSEL:  All right.  Let me ask one final question of both of you, and then we'll turn it to the audience.

So you've made a case that having foreign-direct investment, essentially capital, flow as freely as possible across borders is a good thing.  Would you make the same case about human capital?  Should we move our immigration policy in the direction you think we should move our FDI policy?

MARCHICK:  I'm generally pretty liberal on immigration.  But no, I mean, they're entirely different -- you can't -- we shouldn't open our border to Mexico for all immigrants, for example, or Canada.

It's -- no.  I think that we should -- I'm generally in favor of moving towards a more liberal immigration policy and I think that the data, with respect to the number of scientists and high-skilled workers that we're going to need in the United States is quite compelling that we need to have a more liberal immigration policy.  But do we take it to the same level of openness of FDI -- the answer's no.

WESSEL:  What do you think?

SLAUGHTER:  So David and I have --

maybe have a next project to work on, but we'd have to talk first.

I would tomorrow, if you gave me that magic wand, I'd eliminate all caps on high-skilled immigration to the U.S.  I'd blow up the H-1B visa caps, because I think one of the biggest threats to the competitiveness to the American economy is we're not letting in the foreign talent that wants to work for our key companies that we have.

People worry about exporting jobs and you look again and again -- a lot of globally engaged companies say I can't hire the talent here, because of the visa restrictions.  And so I'm going -- and now, increasingly with technology, you can hire these people in China and India and these other countries.  And those jobs, in some sense, won't come back.  So I'd actually get rid of all the high-skilled immigration caps.  I think Dave's exactly right.

Less skilled immigration is a much more complicated issue, because of the numbers involved and also because I think it's mixed up with a much broader set of issues of -- of citizenry and of kind of justice.

WESSEL:  Okay.

Let's turn it over to the audience.  There are microphones there.  Please tell us who you are and remember that a question ends with a question mark.  (Laughter.)

Sherm, do you want to start?

QUESTIONER:  (Off mike.)

WESSEL:  The mike's coming on your right.

QUESTIONER:  Thank you very much.

Sherm Katz, Peterson Institute.

This is, I guess, a question rising out of the Internet.  When you send around links and say the paper's available, sometimes -- unfortunately for the speakers -- people read it.

Page three of your paper -- (laughter)—

WESSEL:  There's a mistake on the third paragraph, second word.

QUESTIONER:  David does -- I was a lawyer for 30 years so.

You say, after concluding that there's a protectionist drift, you say:  "This drift is already reducing the quantity and quality of global FDI flows."  But then, if you go to page 32 -- I didn't have enough homework last night -- "To date, this protectionist drift has not, evidently, led to a contraction in global FDI flows."  And maybe the key word there is contraction.

You do go onto say, in that same paragraph, "Thus at the margins, these policies, this increasing scrutiny, have discouraged FDI flows."

But it does raise the question of whether your statement on page three is too strong or do you stay with it?

SLAUGHTER:  No, I'd stay with it.  I think, again, the key is, you know, we don't get another draw of history where we can kind of look at FDI flows absent some of these frictions and things we've been talking about, right? 

So how do you measure this in the data?  There are a lot of business forces that drive M&A transactions in general, and cross-border M&A transactions in particular -- cost of capital, general business growth in terms of GDP growth.  Those things have been very supportive of FDI -- cross-border FDI flows in recent years.

So in that sense, the issues that we're worried about with this drift, it's not like they've been driving cross-border M&A transactions to zero.  They haven't.  But you look at particular industries in some countries and you do see that a lot of people are reporting wow, it's a lot harder to do these transactions. 

And it's just a lot of the problem that U.S. cases where transactions that, absent security reviews, would have been done in 30 days are sometimes done in six to nine months.  That has a material impact on the business viability of those transactions and, therefore, the kind of productivity gains and benefits that we talk about.

And the other thing that doesn't show up in the data is all of those transactions that might have happened otherwise but that don't even show up in the data because the firms were discouraged from the policy environment.  So that's the sense in which I think measuring this thing is really hard. 

There's a lot of forces out there that have been supporting FDI, and one of the things we -- why we worry about the drift is if we have a cyclical downturn in cross-border M&A that looks like it's taking shape, as Dave really pointed out, now if we have more of these policy frictions arising, what's that going to do to the volume and kind of the quality of those transactions going forward?

MARCHICK:  I would just add that in my previous -- both in my previous life and my current life at Carlyle, I mean, my previous life I can tell you that there were a number of very significant transactions that I was deeply involved in that never made it to the board room because basically folks said we're not going to do this because of either the regulatory environment or the political environment, not only in the United States but elsewhere.

And in the private equity industry -- less in the United States, but around the world in some countries -- we're not pursuing investments today that we probably would have two, three years ago, because we don't think we can get them done.

WESSEL:  Yeah.  Bring the mike up here?

QUESTIONER:  Hi.  Barbara Slavin from the U.S. Institute of Peace.

This is just a kind of technical question.  What's been the impact of the falling dollar on all of this?  Because it would seem that there's a bargain sale available here in the United States for assets, and that the numbers would be going up because of that.


WESSEL:  Why don't you keep the mike and pass it to your left there?

SLAUGHTER:  So on that -- that's a great question, as was the other one.  I think the accumul -- on net -- the depreciation of the dollar means on net the rest of the world isn't as happy buying U.S. assets as they used to be, right?  So what's been going on is there's been this shift in demand away from U.S. assets towards other countries' assets, and the fall in the dollar is kind of a summary of that.

And what we worry about a bit is -- part of what's making the rest of the world less happy to buy U.S. assets in recent years has been the rising and ongoing controversy about FDI in the United States.

Now, for any -- that's kind of on net.  Now, if I'm a particular company contemplating my international business strategy, you're right.  The fall of the dollar, all else equal, might make certain U.S. assets more attractive.  But we're not seeing that in the aggregate.

Inward FDI flows into the U.S. are down -- what was the number, 45 percent this year so far?  So that's part of -- this is one of the asset classes where we're seeing the rest of the world not as happy buying U.S. assets.

And our concern again, with this drift, as I mentioned a little bit ago, is if we make the rest of the world a lot less happy buying U.S. assets --

QUESTIONER:  (Off mike.)

SLAUGHTER: -- yeah.  I mean, we can have the dollar fall farther.

QUESTIONER:  Camille Cesar (sp) from Commerce, and thanks for the talk.

How much of the increase in CIFIUS filings do you think is due to the fact that there's more risk aversion that a lot of companies and their lawyers have with respect to taking the regulatory risk of not filing?  And how much is this a reflection of just a shift in attitude toward business regulation generally, or people expect now that they're likely to see more activity from the government than they have for maybe a quarter-century?


MARCHICK:  Great question.  I think it is -- the significant increase is almost entirely due to a lower appetite for risk, for regulatory risk, given a much more difficult regulatory environment.  Okay?  So that CIFIUS, for the non-controversial cases, can be seen as a stamp of approval once you get through it because then you can't have the transaction reopened.

And companies are now filing, you know, in my view, ridiculous CIFIUS filings.  I mean windmill farms, roads.  How can a windmill farm affect national security? 

And so I think that is a negative thing overall, unless you're a lawyer, which I was == and I enjoyed some of the CIFIUS business before -- but I thought it was bad policy and a bad trend.  And I think that it adds friction, you know, to the wheels of commerce for no benefit.  And third, I think it impedes CIFIUS' ability to focus on the cases that really matter.  It's almost like a triage, you know?  Top Mailland (sp) uses this.

You know, when you go to an emergency room you want to have someone basically say all right, we're going to slow down this patient and really focus on this person because they're, you know, in bad shape.  You want CIFIUS to do the same thing.  There are transactions that CIFIUS should block, okay, and you want them to focus on that tough case.  You don't want them to focus on windmill farms and toll roads.

WESSEL:  In the back?

QUESTIONER:  Has your ability to calculate --

WESSEL:  Can you identify yourself?

QUESTIONER:  Right.  Gary Horlick, Wilmer Hale.

Has your ability to calculate regulatory risk changed over the last few years, both in the U.S. and other countries?

MARCHICK:  What do you mean by calculate?

QUESTIONER:  Well, you could sort of guess what the regulatory risk, let's say was X 10 years ago or five years ago.  Can you calculate if it's X or are you further -- are you more risk-averse about your calculation now?

MARCHICK:  Okay -- it's a great question, and I've learned this quite since being at Carlyle.  When a company makes an investment decision the first thing they look at is can we make money?  Okay.  What's the -- basically risk-adjusted return for the economics?

Then they say, okay, what do we need to do to get this deal done, okay?  As Matt said, if there is greater uncertainty about the likelihood of regulatory approval, or if there is a greater likelihood that the regulatory approval's going to take six or nine months, rather than 30 days, that changes the risk-adjusted returns in a negative direction and makes it more unlikely that you're going to pursue the deal.  Okay?

So post Dubai Ports in the United States, post legislation in Russia, post changes in China, post the new legislation they're considering in Germany, there's greater regulatory uncertainty and, therefore, a higher risk, and therefore you need to have a higher return in order to justify the investment.

And so yes, I mean, that tends to push down the number of investments and the quality and type of investments that people pursue.

WESSEL:  What I think he was asking is on a given deal, is it harder for you to say to the client, look, you're going to get a little grief here, but it's going to go through and it's going to take you six months?  Is it harder to give the prognosis?

MARCHICK:  I -- I mean, I think good lawyers will do that; good advisers will do that.  But in some cases, you just don't know.

SLAUGHTER:  Can I have a quick two-head on both these questions?  One of the things people have pointed out over the many years that's a real competitive strength of the U.S. economy is the depth and liquidity and transparency of our capital markets.  And so I just want to make a point of contact.

A lot of you might be aware of this kind emerging discussion about the competitiveness of American capital markets and the concern about that.  This CIFIUS issue is a piece of that.  And for other countries where a big part of their development challenge is developing deeper, more transparent capital markets -- take China and India, for example, where capital allocation is not drive by these sort of risk-adjusted calculations Dave's talking about.

Those countries moving in the direction of saying boy, we're going to have to start to initiate our own reviews and think harder about this.  That's -- for them, that's a real impediment relative to what they need to do developmentally.

WESSEL:  Mr. -- Stephen there?

QUESTIONER:  What are the sorts of things --

WESSEL:  Can you identify yourself?

QUESTIONER:  Yeah.  Stephen Heifetz with the Department of Homeland Security.

What are the sorts of things do you think that CIFIUS --

WESSEL:  You can take the mike.  (Laughter.)   Even if you work for Homeland Security.  (Laughter.) 

QUESTIONER:  It's a high risk --

WESSEL:  They sanitize it before -- between each speaker.  (Laughter.)

QUESTIONER:  What do you think CIFIUS as a body can do to make its triage process more effective?  What sort of signaling do you think they can do?

SLAUGHTER:  First thing is, I think, that the new law and the new executive order and the new regulations help, because, again, I don't think it's a national security problem.  I think it's a political problem.  It's a tension-between-the-branches-of-government problem.  And I think that the fact that Congress passed the law calms the water, and I think that CIFIUS did a good job in issuing new regs. 

I think the most important thing is going to be in the data.  For example, the number of mitigation agreements that have been executed this year has gone down a lot, even though the number of filings has gone up.  I think that's a positive thing, and that will give people comfort.

If there are fewer transactions that go to second-stage investigation or withdrawn, that's positive too.  But basically people are going to look at the data and see how CIFIUS is performing overall.

QUESTIONER:  I'm Bob Herstein. 

Looking at sovereign wealth funds -- unlike Sherman, I haven't had a chance to read the report, and you may have covered --

WESSEL:  He only read two pages.  (Laughter.) 

SLAUGHTER:  Two good pages!

MR.    :  That's right, the beginning -- (off mike) --

WESSEL:  We know we need a proofreader --

QUESTIONER:  I get the impression from you, from what I've heard this morning, that sovereign wealth funds are on a par with New Mexico investing its oil royalties and distributing them.  Is that really the case?  Is it possible there's a new problem that we have to cope with and that efforts to cope with it don't necessarily indicate an increase in protectionist risk, but an effort to cope with a new problem?  If so, what is the problem?  If you see a problem, what is it and how do you think we should cope with it?

MARCHICK:  Okay.  Great question.  I -- from a structural perspective, sovereign wealth funds and the fund in New Mexico or Wyoming are the same.  They're essentially wealth funds to create wealth for future generations, okay?  For governments to manage that wealth.

From a security perspective, they're different, okay?  I do think we have security concerns about some government-owned entities investing in some U.S. assets, and there are some U.S. assets -- say, in the telecommunications industry -- that we probably shouldn't sell to foreign governments, because we know that we, our government, tries to listen to people's phone calls and we know that other governments try to listen to people's phone calls.

And so therefore when a foreign government buys a U.S. communications company that's sensitive, that raises legitimate concerns.  But I think the CIFIUS process is adequate to deal with that threat, and we don't need new restrictions or new regulations.

And I also worry about the dampening impact of political rhetoric on investment from sovereign wealth funds.  Again, 90 percent of sovereign wealth funds invest in passive end stakes -- tiny stakes, control stakes.  You know, Norway doesn't take more than 5 percent of companies.  They never sit on the board.

There are a few sovereign wealth funds that like to take control stakes, but sovereign wealth funds basically injected a huge amount of liquidity into our financial services companies in November, December, January, which I thought was a positive thing for the U.S. economy.

And then right after that there were five or six hearings in Congress basically saying why are we allowing these companies, these sovereign wealth funds to invest in the United States?  If you're a sovereign wealth fund, you're probably not going to say boy, that -- can't wait to do my next investment.

And so I think that there is a negative impact of political   rhetoric on the Hill on sovereign wealth funds, and I think that's a negative thing for the U.S. economy.  It's not like the sovereign wealth funds were begging to go in and invest in Citibank or Morgan Stanley or others.  Those companies had a severe crisis and they went asking for the investment.

WESSEL:  Paula?  Over here.  The mike's coming on your left.

QUESTIONER:  Paula Stern, the Stern Group.

I'm interested in the mitigation agreements.  And to the extent to -- and the angst that exists in -- with regard to the sovereign wealth funds in particular.  And I'm interested in knowing whether your example of Norway, which has a practice in its sovereign wealth funds of not taking control, if there is something that should be done in public policy, maybe through multilateral negotiations -- as you mentioned, the OECD, the IMF, et cetera -- which would be kind of best practices, if you will, from the point of view of dealing with sovereign nations who are investing in U.S. assets or other countries' assets.

The fact of the matter is we've got a protectionist drift, as you say, and if you're trying to stave off that and yet not chill the trade, shouldn't we get ahead of this a little bit with -- perhaps Norway is the best example, and that we would like to see Dubai or other Saudi sovereign countries adopt?

WESSEL:  Okay.  Matt?

SLAUGHTER:  Great question.  So as an economist, I'll put in a couple -- fortunately, the market does a little bit of it for us, right?  I think a lot of these sovereign wealth funds have taken passive investments purposely because they realize they're entrusted with shepherding some public funds for their citizens, and they realize we're not good at running companies. 

So kind of like you and I as investors don't -- you know, I don't aspire to go out and try to run a company, because I wouldn't know how to do it.  I don't know -- my wife's lost count.  I don't know what we'd do.  But the money gets invested passively by most of us, right? 

Most sovereign wealth funds are the same way.  If a sovereign wealth fund decides boy, we want to get in the business of running companies, well, again, they've got to be able to -- there's a market mechanism here which is very useful, which is they've got to go the shareholders of Northwest or Anheuser-Busch or any U.S. company and convince those shareholders they're going to do a better job running the company than the incumbent management.  And if they can't do that, like any other investor that tries to take over a company, they're not going to succeed.  And that --

WESSEL:  Well, wait, wait, wait.  If Putin comes in and wants to buy an American company and I'm selling my share --

SLAUGHTER:  So there's --

WESSEL:  I don't give a damn about how he's going to run the company.

SLAUGHTER:  That's fine.  That's my third point, which is, again, I think CIFIUS has existed for a long time to take a good security look at any foreign government-affiliated company. 

And here I think, in echo to Robert's question, in my mind, there's no qualitative difference between sovereign wealth funds or state-owned multinational companies.  We've been dealing with state-owned multinational companies for a generation in the United States.  In terms of the national security concerns, you're darned right you want to take a look at Vladimir Putin's company coming in, if that were to be the case.

Sovereign wealth funds then qualitatively are just like the other foreign government-affiliated multinational companies.  And fortunately, we've got a long history and practice of trying to keep an eye on them.

WESSEL:  In the back here?  Yeah, you.

QUESTIONER:  National security often depends -- you know, where you stand on that -- depends on where you sit.  If you're sitting in Canada and Australia, which are both looking at situations of relatively small populations, huge natural resources, commodity prices soaring, they're both about to come out with new takes on how they review this. 

What do you, as a policymaker in Canada or Australia or a similarly situated country, does it matter that, say, Chinese investment is going from zero to 30 billion (dollars) in Australia, all in natural resources.  All your iron ore, other things are being owned, uranium, say, by Chinese or foreign investors.  Is that a national security issue?  Same in Canada.  Should you worry about Tar Sands being 100 percent owned by Chinese or other investors?

SLAUGHTER:   So -- I don't want to punt on this, but I think Dave and I both agree in the sense that I don't have a strong view to tell other countries what they should define as in their national security interest, right? 

As a U.S. citizen, if I were to think about that, if we had a big pile of tar sands we were trying to think about what to do with, my sense is those assets -- when I worry about what governments might do that you worry about, a lot of those natural resources, you've got the advantage of they're inside your physical boundaries and they can't be taken away.  So the ability of the government to kind of protect those assets is qualitatively a lot easier than it is if it's some IT software program.  So I'd worry less about any foreign entity, government-affiliated or not, owning it.

So those governments are going to kind of have their political process go on and we try to set out a set of principles there.  And one of the things I think that I will say, though, is the idea of kind of drawing up these lists beforehand -- we in the U.S., in the CIFIUS process, have -- this has been an ongoing issue -- because when I was at CEA, I sat on CIFIUS.

This idea that you know beforehand what industries are inherently kind of national security concerns and not, boy, the way -- global business changes very quickly.  That's a hard game to try to get into.  And I think there's not value in doing it.

WESSEL:  There's two in the back.  First the green shirt and -- green tie, and then to your left.  Or the other way around.  (Laughter.)

QUESTIONER:  Russ Denning (ph) at SAIS.

My question relates to your recommendation that FDI screening decisions be based upon national security and not economics.  My question is where do you draw the line?  I assume Lou Dobbs would draw quite a different line than the three of you would.  (Laughter.)

Is there a set of objective criteria, or does it boil down to apolitical decision in the end?

MARCHICK:  It's a very hard question.  I think it boils down to a political decision, basically.  Traditionally national security in the United States, for example, focused on defense assets, assets that support the intelligence community, and critical components that go into our defense supply chain.  I think the definition has broadened to cover certain critical infrastructure. 

I think going back to Ted's, I think that that's a legitimate national security issue for some countries, if a significant amount of their resources are going to be owned by one country and you don't know how that country is going to behave.

What -- again, it's a continuum.  And on the one -- if it's a defense asset, it's easy.  If it's bubble gum or windmills, it's easy on the other side.  In the middle, it's hard.

If you look at, for example, New Zealand just blocked investment by the Canadian Public Pension Fund in their airport, okay?  Now, it's a legitimate public policy decision that they're -- a strong argument for your side of whether airport operations should be privatized. 

But is there a delta from a economic security risk, from having domestic New Zealand owners own that asset, 40 percent of that asset, or the Canadian Pension Fund, which doesn't strike me as a particularly aggressive entity?  You know, they blocked it.So I think that's a problem.

SLAUGHTER:  And that's right.  The answer to that question comes back to what David mentioned earlier.  The better we do a job in our country and other countries of having people, citizens, have a sense that globalization works for them, the less politicized I think CIFIUS, like any of the other issues, will become.

QUESTIONER:  Jeff Price, Steptoe and Johnson.

I wonder if we could go back to global policy and the role that multilateral and bilateral investment agreements play in structuring and promoting direct investment.

For instance, the U.S. model investment agreement doesn't necessarily affect CIFIUS, but it would provide market access that isn't currently enjoyed in countries like Russia, India and China.  And  there's a significant international instrument for affecting investment policy.  I wonder if you could speak a little bit more about that.

MARCHICK:   I think that from a policy perspective, Matt and I and Ted Alden -- I don't know where Ted is, but we should thank Ted for all his great help on this -- had a lot of back-and-forth.  And Richard Haass was very interested in this.

I think from a intellectual perspective, Matt and I would both be very supportive of rapid expansion of (BITs ?) and even going back to an MAI-type agreement.  But we didn't put that in the --


MARCHICK:  Multilateral Agreement on Investment, which basically blew up over politics, both in the United States over outsourcing issues, and in France over environmental and other issues.

We both would support that, but we didn't recommend it in the study, after considerable debate with Ted and others, because it's just politically untenable.  So we thought that what we should do is focus on things that were achievable and actionable.  So -- yup.

WESSEL:  In the back, by the camera, and then over here after that.

QUESTIONER:  Hi.  Carmencita Whonder with Brownstein Hyatt Farber Schreck. 

I've worked on the Hill, and I saw after Dubai Ports World a large number of companies constantly coming to get approval from members of Congress before they actually went through with the transaction or before they even decided who they would sell their companies to.

Can you talk about the positives or negatives of doing that, and do you think that the new CIFIUS law should, you know, be allowed to play out before companies continue to engage in that practice?

MARCHICK:  What Carmencita didn't mention is that she worked for Senator Schumer.  (Laughter.)  And when I was advising companies, I always said there was a two-step CIFIUS process if you have a sensitive asset.  The first is to get approval from the Committee on Investment in Chuck Schumer's office -- (laughter) -- and then you go to the Committee on Foreign Investment.

So, I mean, in general, I think it's a negative that you have to go to the Hill and basically say here's why this investment is not a problem.  Because that is a political activity related to something which I think is a positive good in the United States, which is foreign investment.

SLAUGHTER:  And again, it's one of those --

MARCHICK:  It's reality, though.

SLAUGHTER:  But it's one of those frictions, right?  That's time and energy and billable hours that these companies aren't putting into their main business.  And that's one of these costs that we talk about in terms of capital markets and how they function.

MARCHICK:  But would I advise a company that has a sensitive transaction not to go see Chuck Schumer first?  No way.

QUESTIONER:  Yeah.  Michael Maibach.  I'm the president of the European-American Business Council, and we're 70 companies that strongly support foreign investment, company to company.

I think though that state-driven foreign investment does cause political problems for private company investment.  And I think we ought to think about what we do in the WTO where we have the subsidies code that has a market and non-market rules --  dumping code -- it has the same, rather than let's just treat it all equally.

And I'll tell you why I think it's a political problem.  You take an average American citizen.  They're told all their life we're for free markets, competition, company to company.  They go to the gas station, they fill up their tank, now $4 a gallon.  It goes to a sovereign wealth fund that buys their company.  This is what the CNOOK and Dubai were about.  Those were both political issues because they were both state capitalism.

So you undermine the democratic support for free trade and markets when they think that an OPEC monopoly cycles money into sovereign wealth funds and buys their company, rather than their products.  And I think that's a legitimate political issue, and I think it does challenge the support for private government -- sorry, company-to-company foreign investment and free enterprise.

WESSEL:  One of you want to respond?

MARCHICK:   I agree with that sentiment that it's a complicated issue.  I guess my view is it's better to engage those foreign stakeholders, those governments and those companies, to try to get them to see the value of letting markets do a lot of stuff and have governments -- not do nothing, but kind of the sort of things governments are wonderful at doing.

That's -- I acknowledge it's a messy process.  I guess I worry about, any time I hear that sentiment, that I kind of implicitly hear in what you say of boy, let's just cut off the borders till they get better.  It's through engagement and trying to have the process move along.

QUESTIONER:  The WTO has different rules.  It doesn't mean you cut off trade.  It means there's different rules for different actors, because statism is different than capitalism.

QUESTIONER:  It's non-market economies versus --


QUESTIONER:  -- the way we had it in our -- you know, in our laws.

WESSEL:  Mm  hmm.  Let's take one more question in the back there, and then I think we need to call it quits.  But I think both the speakers will hang around if you want to talk to them.

QUESTIONER:  Michael -- (inaudible) -- with Sodexo Incorporated.  I thought I heard you say, David, that in terms of the trends, political trends and regulatory trends, that they're not as onerous, or don't appear to be as onerous, or perhaps they're even on a positive swing, or at least maybe flattened.  They're not going south.  Is that right?

MARCHICK:  No, that's kind of the opposite of what we're saying.  We're saying we're not in a crisis situation, but the trends are going in the wrong direction

WESSEL:  No, but you said, in discussing CIFIUS, you seemed to be optimistic.

MARCHICK:   I think this year, hopefully, we'll see the pendulum swinging back towards the center on CIFIUS.  I think that perhaps there was not enough rigor in the system or not enough communications about the level of rigor with the Congress.  Post Dubai Ports, I think the system swung way out of whack and, hopefully, things will be moving back towards normal equilibrium now that we have a new law, new regs, new executive order.

WESSEL:  Thank you all for excellent questions and your attention, and -- (inaudible).  (Applause.)






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