Outbound Investment Tool Will Face Pressure, Implementation Challenges, Former Officials Say

Although the Biden administration appears to be leaning toward a narrower outbound investment screening mechanism than previously expected, that doesn’t mean the tool will remain narrow indefinitely, former U.S. national security officials cautioned this week. They also said they expect implementation to be challenging, particularly as the government tries to define specific technologies outbound reviews should capture.

The administration is reportedly considering narrowing an upcoming executive order on screening outbound investments to focus on quantum computing, artificial intelligence and semiconductors as opposed to a broader range of critical and emerging technologies (see 2301120035). But even though the order’s proposed language may not cover other sectors, such as biotechnology and battery technology, it could eventually be expanded, said David Kris, a former head of DOJ’s National Security Division.

“There's going to be some event at some point that either genuinely does or is used to highlight some shortfall, and that will lead to expansion,” Kris said this week on Steptoe’s Cyberlaw podcast. He pointed to the 2006 Committee on Foreign Investment in the U.S. review of the proposed acquisition of the North American operations of P&O Ports by Dubai Ports World. Although CFIUS approved the deal, DP World pulled out after lawmakers voted to block the transaction, and Congress eventually voted to amend CFIUS to change how it approached future deals.

Kris said he believes a new, narrow outbound investment screening mechanism could face similar scrutiny. “I would say the pressure here is going to remain for quite a while,” said Kris, founder of consulting firm Culper Partners. “Like many conversations in Washington, D.C., this one will not end ever, or at least not in the near term.”

Part of that pressure will undoubtedly come from Congress, which included language in the 2023 government spending package that requires the Commerce and Treasury departments to craft a report describing their efforts to study the creation of a new investment regime (see 2212270030). Some lawmakers were hoping to include an outbound investment review legislation in the FY 2023 National Defense Authorization Act, but the effort didn’t have enough support (see 2209290043 and 2207140035).

Even if the new outbound mechanism starts out with a narrow scope, it will still be “devilishly hard to implement,” Michael Ellis, a former National Security Council official, said during the podcast. “There’s going to be a lot of very practical questions around implementation that will have to be worked through,” he said, such as what constitutes specific critical technology sectors and how particular investments are or aren’t related to the mechanism’s covered technologies, such as AI.

“That’s why I think this is still going to take a little while to work out, even if the scope has been reduced to only certain critical technology sectors,” said Ellis, a visiting fellow at the Heritage Foundation.

He also noted that it’s unclear when exactly the new investment screening regime will be established. The administration is reportedly soliciting feedback from allies on the proposed regime, a move suggesting it’s “fairly far along if they have a version that's sufficiently developed to share with allies,” Ellis said. But he also said that process of seeking input can be “very slow.”

“We've seen before from the Biden administration -- they prefer deliberative processes that result in everyone being in the same position. They seek consensus before they roll something out,” Ellis said. “So it might still be a while yet before we see any outbound investment executive order.”