Foreign Direct Investment Screening in the Arctic

This report is part of a series that CNA produced to fulfill requirements outlined in the fiscal year (FY) 2020 National Defense Authorization Act (NDAA), Sec. 1260E. The FY 2020 NDAA mandates that a federally funded research and development center “complete an independent study of Chinese foreign direct investment [FDI] in countries of the Arctic region, with a focus on the effects of such foreign direct investment on United States national security and near-peer competition in the Arctic region.” The Department of Defense selected CNA to execute this analysis, for which CNA produced four reports. In this report, we examine the legal conditions governing investments in the Arctic.

Organization

That examination hinges on the two mechanisms that Arctic states can use to manage inbound investment: FDI screening systems and sectoral policies. On the one hand, FDI screening systems are only one means to evaluate inbound investments. On the other hand, sectoral policies can also functionally control and constrain FDI. These techniques can be understood as the differences between “nets” and “walls.”

• FDI screening systems operate like nets. Investments are permitted, by default, but may be rejected if certain features of a project capture the attention of regulators. Because investments under this rubric often do not require explicit permission, some investments may pass through unnoticed.
• Sectoral policies operate like walls. Such policies cordon off certain industries from external investment and by default prohibit or limit foreign investment opportunities. Authorities can choose to waive these rules, but those actions would by definition follow from an initial awareness of the inbound investment.

Although the NDAA mentions only FDI screening, we assessed both mechanisms since both can be used to filter incoming investments for their harm to national security.