December 4, 2007
HP-710

Remarks by Deputy Secretary Kimmitt to the
U.S.-GCC Investment Forum in Bahrain

Thank you both for your kind introduction and for the opportunity to speak at this very timely Forum. The United States Treasury Department welcomes the inauguration of the Forum and hopes it is the first of what will become an annual dialogue on the increasingly important topic of investment.

Almost exactly two years ago in December 2005, a company from the United Arab Emirates submitted a proposed acquisition to the Committee on Foreign Investment in the United States, known as CFIUS, for national security review. That company was Dubai Ports World (DPW). The U.S. Government's handling of that transaction, as well as the U.S. public's reaction and the aftermath of the case, called into question the United States' long-standing commitment to open investment.

This evening, I want to talk about what we in the U.S. Government have done since that time to correct this image and reinforce our unshaken commitment to welcoming foreign investment.

Our strategy has three components: (1) improve our internal processes and reaffirm our open investment policy, (2) work with Congress on CFIUS reform legislation to rebuild faith in and strengthen the national security review process, while remaining open to foreign investment, and (3) engage bilaterally, regionally, and multilaterally with our international partners to stress the importance of opening markets to investment opportunities.

I bring this message to you because the Middle East and North Africa (MENA) is a region of high priority for our open investment policy. In 2003, President Bush proposed the Middle East Free Trade Initiative, a plan of graduated steps for Middle Eastern nations to increase trade and investment among themselves and with the United States. We already have Bilateral Investment Treaties (BITs) or Free Trade Agreements (FTAs) containing investment chapters with Bahrain, Egypt, Jordan, Morocco, and Tunisia, as well as an FTA with Oman that has been ratified but not yet implemented. We have also explored BITs and FTAs with several other countries in the region, as well as Trade and Investment Framework Agreement action plans with nine countries in the region.

Beyond government initiatives, there is also a growing interest by U.S. investors in the region. From 2000-2006, the stock of U.S. foreign direct investment (FDI) in Gulf Cooperation Council (GCC) countries increased by $9.4 billion – a 57 percent increase. Granted, we started from a relatively small base, but this increase significantly exceeds the 45 percent increase in U.S. FDI to all other destinations.

The Middle East region is also a significant source of investment – and potential investment – into the United States. The United Nations Conference on Trade and Development reports that the global stock of outward FDI from Middle Eastern countries has more than tripled since 2001, totaling $43 billion in 2006. Official U.S. data shows that over $17 billion of that $43 billion was invested in the United States, nearly a two-fold increase from 2001 to 2006.

And these impressive statistics are part of the significant growth in investment flows across the globe. Let me thus spend a few moments on the global environment within which our bilateral investment relationship operates.

Open economies are crucial in today's integrated global marketplace. The free movement of capital across borders is a crucial source of economic growth. International trade has often garnered the most headlines, and it is indeed an essential component of open economies. However, international investment is of substantial and growing importance. In fact, investment flows dwarf trade flows. In the United States, foreign purchases of long-term securities from U.S. residents totaled over $26 trillion last year, compared to $1.4 trillion in U.S. exports of goods and services. Investment flows are also growing more rapidly than trade flows. Global private capital flows, as measured by the World Bank, grew at almost double the rate of trade flows from 1991 to 2005 – 13.7 percent annual growth of capital flows versus 7.8 percent annual growth of exports.

There is growing global recognition of the importance of FDI and open investment policies. In June 2007, at Heiligendamm, the G-8 countries stated in their summit declaration that they would "work together to strengthen open and transparent investment regimes and to fight against tendencies to restrict them." The G-8 also "reaffirm[ed] that freedom of investment is a crucial pillar of economic growth, prosperity and employment." The Organization for Economic Cooperation and Development (OECD), too, has done excellent work on freedom of investment, which it has identified as an OECD "core value." A recent OECD declaration states that members are "convinced of the long term benefits of an open international investment environment, including in respect of job creation, a more efficient resource allocation, and social and environmental progress." A number of you are participating in the MENA OECD investment program, which has made important strides in assisting efforts to improve the investment climate and dialogue in the region.

In the United States, foreign direct investment supports good jobs, improves productivity, and increases exports and research and development (R&D) investment. The U.S. economy benefits significantly from inward and outward foreign direct investment. U.S. multinational companies that invest abroad have contributed strongly to overall productivity growth in the United States, accounting for half of the increase in U.S. productivity growth between 1995 and 2000. During this five-year period, productivity at U.S. multinationals surged, growing six percent annually.

Foreign-owned firms based in the United States contribute significantly and disproportionately positively to the U.S. economy. For every $10 million invested from abroad, 30 direct and 30 indirect jobs are created or supported in the United States. Research shows that foreign-owned firms in the United States employ over 5 million Americans, or 4.5 percent of the work force. But these firms account for 6 percent of output, 10 percent of all U.S. investment in plant and equipment, 13 percent of R&D spending, and 19 percent of U.S. exports. These firms also pay more than 30 percent higher compensation on average than do their counterparts in the rest of the U.S. economy, and over 30 percent of these jobs are in manufacturing, compared with fewer than 10 percent of all U.S. jobs. Foreign firms in the United States also re-invested $71 billion – or 52 percent of their income – back into the U.S. economy in 2006. Thus, foreign investment, and the healthy competition it brings creates good jobs, spurs innovation, improves productivity, and results in lower prices and greater variety for consumers.

Because of these important benefits to the U.S. economy, steps have been taken recently to reaffirm the long-standing U.S. commitment to open investment. We have long welcomed foreign investment and worked diligently around the globe to create an environment conducive to foreign investment. In an important step, President Bush issued an open investment policy statement in May of this year that made clear that "a free and open international investment regime is vital for a stable and growing economy, both here at home and throughout the world."

Subsequent CFIUS reform reaffirms this U.S. commitment to open investment. The Foreign Investment and National Security Act (FINSA) of 2007 passed in July of this year with broad bipartisan support and demonstrated Congress' renewed faith in CFIUS to carry out its important national security responsibilities within the context of the U.S. open investment policy. FINSA made numerous procedural improvements in the CFIUS process, many of which CFIUS had already begun implementing on its own in response to lessons learned during the DPW case. It is very important to note, however, that FINSA was careful to maintain CFIUS' focus on genuine national security concerns – not broader factors like economic interests, national champions, or industrial policy.

CFIUS is an efficient, disciplined process and reviews only a small portion of eligible transactions. Thomson Financial reports that in 2006 there were nearly 11,000 mergers and acquisitions in the United States, of which 1,730 involved foreign acquirers. CFIUS reviewed only 113 cases, or fewer than 7 percent of these foreign acquisitions. Since 2000, CFIUS has reviewed an annual average of fewer than 6 percent of foreign acquisitions of U.S. businesses.

FINSA also maintains CFIUS' efficient timelines for considering transactions, with strict deadlines for action. First-stage national security reviews must be completed within 30 days. Second-stage investigations must conclude within 45 days. Any action by the President must be taken within 15 days following the conclusion of an investigation. Investigations are very rare. Out of over 100 cases reviewed in 2006, there were seven that went into investigation, only two of which required a Presidential decision, and the President allowed both transactions to proceed. Stated more generally, the vast majority of CFIUS cases are cleared within 30 days. The process is designed to resolve concerns efficiently, rather than prohibit transactions.

More specifically, since Dubai Ports, CFIUS has reviewed 207 transactions, including 15 transactions from four countries in this region. While three of those acquisitions from the region proceeded to an investigation, none of them was blocked.

Despite the clear benefits of open investment policies, there is rising protectionist sentiment globally. Sovereign wealth funds (SWFs) are one focus of rising protectionist sentiment. SWFs are not a new phenomenon. This region has been path-breaking, with one of the first funds, the Kuwait Investment Board established in 1953, and several of the largest, such as the Abu Dhabi Investment Authority.

However, the recent rapid increase in the number and asset size of SWFs has raised their profile and generated concerns. Globally the number of funds has doubled since 2000: from 20 in 2000 to almost 40 now, with over 10 established just since 2005. SWFs manage total assets of $1.9-2.9 trillion. Private sector estimates suggest that figure could grow to $10-15 trillion by 2015. German Chancellor Angela Merkel and others have expressed concerns about whether sovereign investors such as SWFs might be tempted to invest based on political or strategic goals, rather than true commercial purposes. These concerns are now being discussed more broadly within the European Union and elsewhere.

These developments should not cause alarm, but they do point to a need to take a step back and look at SWFs with calm and precision. As SWFs are an outgrowth of domestic and international economic policies, it makes sense to consider them in terms of their potential impact on financial stability. Here, there is much reason to be reassured. SWFs are in principle long-term investors that typically do not deviate from their strategic asset allocation in the face of short-term volatility. They are not highly leveraged, and it is difficult to see how they could be forced by regulatory capital requirements or sudden investor withdrawals to liquidate positions quickly. In this context, SWFs may be considered a force for financial stability, supplying liquidity to the markets, bidding up asset prices, and lowering borrowing yields in the countries in which they invest.

It is also important to distinguish SWFs from other sources of sovereign investment. There are similarities, but also important differences. There is no universally accepted definition of a SWF. However, a SWF can be thought of as a government investment vehicle funded by foreign exchange assets, and which manages those assets separately from official reserves. In contrast, international reserves are external assets that are readily available to and controlled by finance ministries and central banks for direct financing of international payment imbalances. Reserves are by definition invested in highly liquid and marketable securities. Public pension funds are investment vehicles funded with assets set aside to meet the government's future entitlement obligations to its citizens. Public pension funds differ from SWFs in that they are denominated and funded in local currency, usually with relatively low exposure to foreign assets. State-owned enterprises (SOEs) can be defined as enterprises where the state has significant control, through full, majority, or significant minority ownership. SOEs may undertake foreign direct investment and occasional portfolio investments, but the majority of state-owned enterprises do not invest abroad.

It appears that SWFs have so far been seeking to generate higher investment returns without generating political controversy. However, it is necessary to remain vigilant, as SWFs do raise a number of issues. First, does the creation of a SWF perpetuate undesirable underlying macroeconomic and financial policies? It is critical that countries do not use SWFs that are non-commodity funds as a mechanism to accumulate more foreign assets in order to avoid exchange rate appreciation. Second, what is the potential impact of SWFs on financial stability? To date, they have not caused financial market disruption, but SWFs do represent large, concentrated, and often non-transparent positions in financial markets. Third, transactions involving SWFs, like other types of foreign investment, may give rise to legitimate national security concerns. As with any form of foreign investment, recipient countries of SWF investment need to ensure that any national security concerns are addressed.

Inward investment review regimes are another area in which protectionist sentiment may be expressed, whether in response to SWFs or broader concerns. Recently, numerous countries have established or proposed new review mechanisms – not all of which appear as narrowly focused and disciplined as the U.S. CFIUS process. China's new Anti-Monopoly Law, approved in August 2007, creates an as yet undefined FDI review process that will take effect in 2008. This is in addition to a separate process established in 2006 that authorizes review of foreign investment in China based on "economic security" concerns. These review processes go beyond national security considerations, and the rules and plans for implementing these review mechanisms remain opaque. Similarly, Russia has a bill pending in the Duma that would establish a new review process for FDI in a number of "strategic sectors" and would add to Russia's existing FDI restrictions. There are rumblings in other countries as well. Canada, Korea, and Germany, among others, are debating new or expanded investment review regimes. Outcomes remain to be seen, but we hope that resulting processes will be limited to genuine national security concerns, rather than advancing protectionist interests.

The United States is fully engaged in combating investment protectionist sentiments both at home and abroad, including by promoting sound policies regarding SWFs and investment review regimes, in order to counter any tendency toward using these issues as an excuse for protectionism.

We recognize that there are genuine reasons for limited, national security reviews of FDI transactions to consider whether a foreign investor could use its investments to engage in activity to impair national security. SWF investment, like that of other foreign investors, may raise legitimate questions about national security. In addition, their scale/number and tendency toward lack of transparency raise the possibility of potentially negative impacts on global financial stability if funds operate without prudent governance and investment management standards.

We strongly believe the best response to these concerns is to promote sound, reasoned policies, rather than using these issues as a cover for restricting FDI for protectionist ends. The United States is actively conveying this message in multilateral forums. To initiate high-level discussion of the impact of SWFs, Secretary Paulson hosted an outreach dinner at the Treasury Department in October 2007 with the finance ministers of the G-7; the heads of the International Monetary Fund (IMF), the OECD, and the World Bank; and finance ministers and heads of SWFs from China, Kuwait, Norway, Russia, Saudi Arabia, Singapore, South Korea, and the United Arab Emirates. There was a shared realization among participants of a common interest in maintaining open investment and promoting financial stability. The following day, the International Monetary and Financial Committee – a ministerial-level committee whose members represent all 185 IMF member countries – tasked the IMF with identifying best practices for SWFs.

We are also encouraging recipient countries to resist protectionist pressures and not treat SWFs differently from other foreign government-controlled investors. Accordingly, we have asked that the OECD identify inward investment policy best practices for recipient countries of sovereign investment, consistent with open investment principles.

Likewise, the United States is promoting a sound, reasoned, open investment approach to inward investment policy through other multilateral and bilateral engagement. Our involvement in the Strategic Economic Dialogue with China, the Trans-Atlantic Economic Council Investment Dialogue, and other forums include significant engagement on inward investment issues. Senior-level Treasury officials have traveled to Russia, China, Germany, Singapore, multiple countries in the Gulf, and other key regions emphasizing investment issues. We hope to continue to contribute to other countries' internal deliberations on potential investment regime reforms, including by sharing our experience with protecting national security while welcoming foreign investment. We are also engaging the general public and business communities through various publications and outreach events. That is precisely why this U.S.-GCC Investment Forum is so timely and important.

In conclusion, let me reiterate that one cannot overstate the importance of open investment policies for the health of the global economy and our respective economies. The Gulf region is a key part of our open investment commitment. As a result, you can count on us to remain vigilant against protectionist pressures that could threaten global economic growth and prosperity. However, the United States cannot fight this battle on its own. Each country, including in this region, needs to take a careful look at its own investment policies as well as its contribution to global efforts to promote greater openness and resist protectionism. We know we count on your active support in this regard.

Thank you for the opportunity to speak with you this evening.