Background

The United States is the main source of foreign direct investment and also  the leading host country for foreign direct investment (FDI). The top three  destinations for U.S. foreign direct investment, cumulatively as of 2006,  were the United Kingdom, Canada, and the Netherlands. The top three  foreign direct investors into the United States, cumulatively as of 2006,  were the United Kingdom, Japan, and Germany. Figure 1 shows the  amount of foreign direct investment from the United States into the  countries we reviewed and the amount of worldwide investment into these  countries, cumulatively as of 2006.
Foreign direct investment is defined as the purchase of real assets abroad  for the purpose of acquiring a lasting interest in an enterprise and exerting  a degree of influence on that enterprise’s operations. There are several  different kinds of foreign direct investment, including the following:  Greenfield investments: A greenfield investment is the investment in a  physical structure in an area where no corporate facilities previously  existed. It normally entails complete ownership and therefore full control  over management.
Strategic partnerships: A strategic partnership is a formal alliance (joint  venture, licensing agreement, distributorship, or agency contract) between  two commercial enterprises, usually formalized by one or more business  contracts, where they mutually participate in certain activities  (advertising, branding, product development, etc.).
Mergers and acquisitions: A merger is a business event wherein two or  more companies decide to pool their assets to form a single new company.  In the course of this transaction, one of the previously existing companies  ceases to exist. An acquisition does not necessarily constitute a merger if  the preexisting companies continue to exist. Both of these business  transactions can result in a foreign entity gaining a portion of a domestic  entity.

		The Committee on Foreign Investment in the United States

The Exon-Florio amendment authorizes the President to suspend or  prohibit foreign acquisitions of U.S. companies if they are determined to  pose a threat to national security. The President delegated the authority to  investigate individual transactions to an interagency committee, the  Committee on Foreign Investment in the United States. While application  to CFIUS for review is voluntary, firms subject to an Exon-Florio review  that do not notify CFIUS remain indefinitely subject to Exon-Florio and  appropriate actions by the President. However, Exon-Florio applies only  when a transaction is related to national security, which is the case in a  small percentage of the overall number of foreign direct investments in the  United States. According to the Treasury Department, historically less  than 10 percent of foreign direct investments in U.S. companies were  reviewed by CFIUS. For example, in 2006, there were approximately 1,730  transactions of foreign companies acquiring U.S. companies. In the same  year, CFIUS received 113 notices, or 6.5 percent of the total transactions  for 2006. Seven of those notices proceeded to a 45-day investigation and  none of them were prohibited. In 2007, CFIUS received 147 notices. Of  these 147 notices, 6 proceeded to a 45-day investigation and none were  prohibited.
Particular transactions may be approved by CFIUS without conditions, or  may be approved on the condition that the investor adheres to certain  mitigation agreements. The President can, based on the advice of the  committee, exercise his authority under the Exon-Florio provision to  suspend or prohibit a foreign acquisition of a U.S. company only if he finds  that there is credible evidence that the foreign entity exercising control  might take action that threatens national security, and that laws, other  than Exon-Florio and the International Emergency Economic Powers Act,  do not provide adequate and appropriate authority to protect national  security. On July 26, 2007, the Foreign Investment and National Security  Act of 2007 was passed, amending Exon-Florio. The act addressed some of  the issues related to the protection of national security interests. See  appendix III for a summary of the changes.

	Foreign Investment Laws, Policies, and Processes Address National Security Concerns

As is the case in the United States, each of the countries we reviewed has  enacted laws and instituted policies regulating foreign investment—often  to address national security concerns. History and each country’s  experience with foreign investment have influenced its concept of national  security, which in turn influences restrictions placed on investments. For  example, foreign investment policies can be affected by the specific legal  system under which the country operates, and the length of time the  country has adhered to a market-based economic system. Restrictions  range from requiring approval of investments in a narrowly defined  defense sector to broad restrictions on the basis of economic security and  cultural policy. Recent and proposed changes in the countries’ laws and  policies have more explicitly identified national security as an area of  concern, in some cases as the result of controversial investments.

		Various Legal Means Exist to Regulate Foreign Direct Investment

Similar to the United States, the countries we studied generally have laws  and regulations that restrict foreign investment based on national security,  though the scope of that authority varies significantly. See table 1 for the  relevant laws by country and the stated reasons for the restrictions.
The two countries without a review process, the Netherlands and the UAE,  restrict entry into certain sectors or restrict the extent of ownership  allowed in a sector. However, their investment policies are significantly  different. The Dutch law does not restrict foreign investment for national  security. Other than the Dutch Central Bank’s capability through the  Financial Supervision Act to block financial sector acquisitions, the  country has few restrictions on foreign investment. The UAE maintains an  ownership limit of 49 percent on foreign investment in every sector  through its Companies Law. According to U.S. and UAE government  officials, the restrictions were primarily designed to ensure that UAE  citizens are beneficiaries of the country’s economic growth, since a  majority of residents and private sector employees are not UAE citizens.  These restrictions can also be used to protect the country’s national  security interests.

		Historical Factors Affect a Country’s Receptiveness to Foreign Investment

The approach to foreign investment that each country in our review has  taken is based in part on the structure of its legal system, its history, and  economy. For example, the laws regulating investment in countries that  operate under a common law system tended to be less specific and less  detailed than the laws and policies of countries that operate under a civil  law system. More specifically, in a common law system, case law  determines the scope and intent of a given law. In contrast, civil law  systems are, in general, based on a systematic codification of the law. In  civil law systems, case law formally plays a minor role compared to the  status of the civil code. Finally, some countries’ laws do not fit into the  single category of civil or common law system. Instead, these countries’  utilize more than one legal system, and therefore can be described as  mixed. Table 2 categorizes the different legal systems under which the  selected countries operate.
In addition to the impact of various legal systems, in the late 20th century,  several countries began to transition from centrally controlled to market- based economies. As this occurred, previously state-owned enterprises  have been privatized. A country’s experience with privatization can affect  its view of foreign investment.

		Recent Changes More Explicitly Emphasize National Security Concerns

Recent changes to foreign investment laws and policies have in some  cases subjected foreign investment to greater scrutiny. Specifically, each  country has changed or considered changing its foreign investment laws,  policies, or processes in the last 4 years; many of the changes demonstrate  an increased emphasis on national security concerns. In some cases,  specific transactions were catalysts in the reconsideration of policies and  the development of new ones. However, according to government officials  in several countries, these changes simply codified and made more  transparent prevailing practices.

			Canada

The Investment Canada Act provides for a transparent foreign investment  review process. All transactions above designated dollar thresholds are  to be reviewed and approved by either the Minister of Industry or the  Minister of Canadian Heritage. The act currently does not require a review  based on national security. Instead, the review process considers  economic factors and cultural policy objectives. In June 2005, the  Canadian government introduced a bill to amend the foreign investment  review process that included provisions to allow the government to review  foreign investment based on national security concerns. However, the  38th Parliament was dissolved at the end of 2005 to prepare for the 2006  election, and the bill was never passed.
In July 2007, the Canadian government created a Competition Policy  Review Panel to review key elements of Canada’s competition and  investment policies, including the Investment Canada Act, which will be  updated as a result of the panel’s review. The panel is expected to provide  its recommendations to the Minister of Industry by the end of June 2008.  The government of Canada is also examining the need for a mechanism to  screen foreign investment on the basis of national security.

			China

The Chinese political-legal system exerts a wide range of controls over  foreign direct investment and restricts or prohibits foreign investment in  targeted industries via an ad hoc and opaque system of laws, regulations,  and policies, according to the U.S. Library of Congress and officials  familiar with foreign investment in China. In 2005, a U.S. private equity  firm’s attempt to purchase 85 percent ownership of a Chinese state-owned  company that manufactured construction equipment led to a public outcry  against foreign acquisitions in China. Beginning in 2006, China revised its  foreign investment regulations to introduce a new “national economic  security” screening requirement for cross-border mergers and acquisitions.  The Chinese government also introduced a list of seven specific sectors  deemed critical to the national economy, a new 5-year plan for utilizing  foreign investment that promised a fundamental shift from “quantity” to  “quality” in foreign investment, and new provisions on the acquisition of  domestic enterprises by foreign investors. The new regulations were  released by six government agencies, led by the Ministry of Commerce.

			France

In 2000, the European Court of Justice ruled that France had contravened  European Community law by prohibiting an investment in France. The  European Court of Justice ruled that France should clarify its investment  restrictions. As a result, France enacted Law 2004-1343 in 2004, reforming  the foreign investment review process. An accompanying Ministerial  Decree, issued in 2005, identifies 11 sectors of the economy that require  the prior approval of the French Ministry of Economy, Finance, and  Employment when foreign investors seek to obtain a controlling share or a  specified portion of a French company. In October 2006, the European  Commission formally asked France to amend its regulations. As of  February 2008, France has made proposals to address the European  Commission concerns, and discussions are ongoing.

			Germany

The German Foreign Trade and Payments Act, which regulates foreign  investment, was amended in 2004 after a U.S. company bought a  controlling share of a German submarine manufacturer. The amendments  tightened regulations regarding the foreign ownership of defense-related  enterprises. Under the new regulations, the acquisition of more than 25  percent of the voting rights of a German company producing armaments,  ammunition, cryptographic equipment, or engines and gear systems for  tanks or other armored military tracked vehicles is subject to  review. Germany is currently considering further changes to the law to  address the national security implications of investments by sovereign  wealth funds because of concerns that they may be driven by political  rather than economic reasons.

			India

In India, foreign investment in some sectors, including retail and atomic  energy, are prohibited. Foreign investment in other sectors, including  defense, insurance, and print media, is limited. Investments in specified  industries including aerospace and explosives must receive an industrial  license and approval from the Foreign Investment Promotion Board.  Frequent changes to restrictions in individual sectors are common. Recent  changes in Indian investment policy have focused on liberalizing the limits  on the percentage of foreign ownership. For example, in April 2007, India  finalized changes to restrictions on foreign investment in the  telecommunications sector, raising the ownership cap from 49 percent to  74 percent. In January 2008, the government approved additional changes  in other sectors, increasing the limit on foreign investment in petroleum  refining, some parts of the civil aviation sector, and several other sectors.  However, according to an Indian government official, the liberalization  and privatization of domestic investment have had a bigger impact on the  Indian economy than foreign investment. In addition to making changes to  various sector-specific foreign investment restrictions, the Indian  government has also recently considered implementing a national  security-based review process. The National Security Council Secretariat  suggested a new law—-the National Security Exception Act—-that would  have established a process for assessing security threats related to foreign  investment, similar to the process used by CFIUS. Although the act met  resistance from the Ministries of Commerce and Finance and was  subsequently abandoned, India is still debating the need for a national  security review of foreign investment.

			Japan

Under the Japanese Foreign Exchange and Foreign Trade Act, a foreign  investor is required to notify the government in advance if it intends to  invest in sensitive industries, including those related to national security.  The transaction is then reviewed to determine whether it might imperil  national security, disturb public order or public safety, or adversely affect  the Japanese economy. In September 2007, the government instituted  changes to foreign investment policies in Japan. The primary change is  that foreign investment in industries with dual use technologies is now  subject to prior notification and a government review. This change is  intended to prevent the outflow of technology, with a focus on items that  have a high probability of conversion to use in weapons of mass  destruction and items that are used to maintain the defense production  and technology infrastructure. The revisions include a list of all specific  industries and items that fall under the new prior notification  requirements, including accessories, components, and equipment related  to weapons manufacturing.

			Russia

The 1999 Federal Law on Foreign Investments in the Russian Federation  specifically allows the government to regulate foreign investment for the  defense of the country or the security of the state. However, implementing  regulations were never issued. According to Russian government officials,  two transactions, one an acquisition by a U.S. company of Russian  facilities that produced parts for the Russian military, revealed the need  for a formal process to address national security concerns. The  government has since drafted a new law to introduce a formal review of  foreign investment, similar to reviews by CFIUS. The proposed law was  submitted to the Russian Duma in July 2007; however a revised version  was announced by the government in February 2008. According to the U.S.  State Department, the revised law is more restrictive. As of February 26,  2008, the legislation had not been passed and is therefore subject to  change. If the most recent version of the Strategic Sectors Law is enacted,  foreign investors will need government authorization to acquire a  controlling stake in a Russian company in any of 40 strategic sectors. The  new version also restricts foreign investment to 10 percent in companies  utilizing strategic subsoil assets, including oil, gas, gold, and copper. In  addition, the Russian government is in the process of drafting amendments  to the Russian Federation Law on Subsoil. (See app. XI for more  information on the draft Strategic Sectors Law and draft amendments to  the Subsoil Law.)

			United Arab Emirates

The UAE does not have a process for reviewing foreign direct investment  or a law that restricts foreign investment specifically for national security  purposes. However, the UAE’s regulatory and legal framework favors  domestic over foreign investment. For example, the UAE’s Companies  Law and the Agencies Law limit foreign ownership to 49 percent and  mandate that trade must be conducted through an Emirati agent. The UAE  does not allow foreign majority ownership of any business outside of  designated Free Trade Zones, and restricts foreign ownership of land.  Although no UAE law restricts foreign investment specifically for national  security, protection of the UAE’s oil and natural gas deposits is effectively  a national security issue. According to both U.S. and UAE officials, the  UAE government plans to liberalize the Companies Law and the Agencies  Law. However, this probably will happen in stages on a sector-by-sector  basis.

			The United Kingdom and the Netherlands

The United Kingdom and the Netherlands maintain the most open  economies of all the countries we reviewed. However, changes to  regulations affecting foreign investment have been discussed in these  countries. For example, as a result of a potential foreign investment in the  energy sector, the United Kingdom considered whether changes to its  existing foreign investment laws or review process were required. The  British government decided against making any changes to its current  laws. Similarly, members of the Dutch Parliament have discussed the  possibility of changes to their merger and acquisition regulations as a  result of a recent transaction.

	Foreign Investment Review Implementation Has Many Similarities in Different Countries

While there are many unique characteristics to the systems employed by  the 10 countries to regulate foreign investment, in many ways the systems  are similar to each other, and in several ways similar to the CFIUS process  in the United States. See table 3 for a comparison of selected elements of  the countries’ foreign investment review processes.
Eight of the 10 countries use a formal review process to approve or deny a  transaction. Generally, this review is conducted by a government  economic body with input from government security bodies, and national  security is a primary factor or one of several factors considered in  evaluating transactions. Although the concepts of national security vary  from country to country, all countries share similar concerns about  national security-related issues. These concerns include, for example, their  defense industrial base, and more recently, investments in energy sectors  and investments of state-owned enterprises and sovereign wealth funds;  the latter because of concerns that political rather than economic  motivation may be behind the investment.
As in the United States, most countries have established time frames for  the review ranging from 30 days to 6 months, and a majority of the  governments can require that certain conditions be met prior to approving  a transaction. For example, a country may place national citizenship  requirements on company board members. Unlike the U.S. system, most  countries’ reviews are mandatory if the investment reaches certain dollar  thresholds or if the buyer will obtain a controlling or blocking share in the  acquired company. Finally, unlike in the U.S. process, five countries allow  review process decisions to be challenged in court or through  administrative means. In addition to the formal mechanisms, there are  unofficial factors that may influence investment in each of the 10  countries. For example, in some countries, it may be necessary to vet  sensitive transactions through a political process before the formal legal or  administrative process is initiated.

		Most Countries Use a Formal Review Process to Regulate Foreign Investment

Eight of the 10 countries we examined rely primarily on a review process  through which the government grants or denies approval for transactions,  usually above a specified threshold or within specified economic sectors.  Canada reviews investments above specified monetary thresholds to  determine if they would provide a net benefit to Canada. China maintains a  decentralized review process split between central and local government  authorities and retains the power to restrict or block any foreign  investment that may have a significant impact on national economic  security. In France, prior government authorization is required for foreign  investments in 11 sensitive sectors. Germany reviews foreign investments  specifically for national security purposes, but limits those reviews to  investments in the German defense industry. Although foreign investment  in India is primarily regulated through sector-based ownership  restrictions, India also uses a review process. Japan reviews transactions  in sectors potentially affecting national security, public order, public  safety, and the smooth management of the economy. Any foreign  investment over 10 percent in a company listed on the Japanese stock  exchange and any investment in an unlisted company that falls into the  specified sectors must provide prior notification and is reviewed.  Investment in all other sectors must provide notification after the  investment is made, but those investments are not reviewed. In Russia the  anti-monopoly review has been used to review foreign investment  transactions for national security purposes. The government of the United  Kingdom has the authority to review and block transactions that may have  an adverse effect on competition and the public interest. The United  Kingdom also can intervene when confidential defense-related information  is involved. This latter intervention is separate from the formal  competition review.
Besides a formal review process for foreign investment, every country  reviewed had companies and sectors that are fully or partially government  owned or controlled. For example, in India, foreign investment in the  state-owned atomic energy is prohibited. In the Netherlands, as well as  other countries, there are restrictions in areas such as transportation and  public utilities. In the UAE and China, there are significant restrictions in a  number of areas.
Some countries have companies that are fully or partially owned or  controlled by the government that may allow domestic private investment,  but restrict foreign investment. An example of this type of barrier to  investment includes golden shares. Golden shares are special rights given  to governments in private companies. Such rights allow the government to  maintain a certain degree of control over such companies. For example, a  government may maintain control over the percentage of foreign-owned  shares, or approval requirements for the dissolution or disposal of any  strategic assets. The European Court of Justice ruled against governments  utilizing golden shares in 2002 and 2003 because these shares restrict the  free movement of capital within the European Union (EU), and  determined that the use of golden shares is acceptable only in specific  circumstances.

		Reviews are Normally Conducted by an Economic Body within the Government

All 8 of the countries with a review process have formally designated an  economic-related ministry or body within the government to conduct the  review. This body generally coordinates as needed with government  security bodies. For example, similar to several countries we reviewed,  France’s Ministry of Economy, Finance, and Employment is the focal point  of the review, and this ministry confers with the Ministry of Defense and  other relevant ministries, depending on the sector of the proposed  investment. In China, the Ministry of Commerce has primary responsibility  for reviewing and supervising foreign investment transactions. In Japan,  foreign investors must provide notification to the Ministry of Finance and  the ministry with industry area jurisdiction. Russia and the United  Kingdom both maintain the legal process to block investments based on  national security concerns. Investments that must be reviewed for national  security reasons are routed through their competition review process.  None of the countries we studied, however, maintain a formal interagency  review committee such as CFIUS.
As is the case in the United States, in other countries, such as France,   India, and Russia, bureaucratic tension exists between economic  government bodies and generally more conservative, security-focused  bodies within the government such as the defense ministry. This natural  tension serves to balance economic and security concerns both when laws  and policies are being developed and when decisions are made on  individual applications in the review process.

		Countries Share Similar Concerns about Foreign Investment

Many of the countries have concerns about national security-related  issues. National security, as viewed by each of the countries, is a primary  factor to be considered in evaluating transactions in seven of the eight  countries with a review process. It is Germany’s sole factor for review of  investments. However, there is diversity among the countries as to what is  considered essential to national interests and when it is necessary for the  government to protect certain sectors from foreign investment or control.  This diversity is reflected in each country’s foreign investment regulatory  regime. Factors considered during the review of foreign investment in  other countries include public safety, public order, economic concerns,  and cultural policies. Some countries do not specifically use the term  “national security” in their laws, and most countries do not define what is  covered under the term “national security,” or similar terms such as  “public interest,” “public order,” or “essential security.”
Most countries have provisions that limit the sale of defense companies to  foreign investors or provide for a review of those investments. The  Chinese Catalog for the Guidance of Foreign Investment Industries  states that foreigners are prohibited from investing in Chinese companies  that manufacture weapons and ammunition. India requires official  approval and limits foreign ownership in the defense industry to 26  percent. In the UAE, foreign investment in military production is clearly, if  not explicitly, off limits, according to a UAE official. Japan requires prior  notification and approval for foreign investment in defense-related  industries, including companies producing dual use items. France and  Germany require reviews for foreign investment in companies with  sensitive or classified technologies or contracts, while Russia and the  United Kingdom also normally review these investments. The other two  countries we reviewed are less restrictive. Canada’s review process does  not address foreign investment in the defense sector beyond the  thresholds for review that apply to all foreign investments. The  Netherlands has no restrictions on foreign investment in the defense  industry other than those that are derived from international agreements.
All countries, with the exception of Germany, have specific restrictions or  review requirements that apply to investments in companies involved in  the production or distribution of energy. This issue of energy security,  especially with regard to the foreign acquisition of energy infrastructure,  has been raised by the European Union. For example, in September 2007,  the European Commission put forth a proposal to establish a European  energy policy. One aspect of this energy policy proposal would be a  prohibition on non-EU companies acquiring control of a European  Community energy transmission system or transmission system operator,  unless it is specifically permitted by an agreement between the EU and the  foreign company. The stated goal of this proposal is to promote  competition, but the effect would also be to block foreign companies,  state-owned enterprises, sovereign wealth funds, and others from being  able to acquire certain energy assets in an EU country.
Some countries review or restrict foreign investment based on economic  security or cultural nationalism. Canada, China, and Japan formally  indicate economic reasons as part of the criteria for the review of foreign  investment. For example, China reviews the acquisition of traditional  Chinese brands, and Canada restricts foreign investment specifically to  protect Canada’s cultural heritage. The UAE also has in place investment  restrictions focused on ensuring UAE citizen involvement in the country’s  economy. India maintains restrictions on investments in the financial  sector, defense industry, real estate, infrastructure, telecommunications,  print media, and single-brand product retail, among other sectors.
Government officials in six countries have expressed specific concerns  about investments by foreign state-owned enterprises or sovereign wealth  funds. Because sovereign wealth funds are government owned, there are  concerns that they may be guided by political objectives rather than profit  maximization or that their financial decisions may be motivated by  support for certain “national champion” companies. A sovereign wealth  fund is a fund owned by a government and is composed of financial assets  such as stocks, bonds, property, or other financial instruments. Sovereign  wealth funds are generally composed of government fiscal surpluses, or  from official foreign exchange reserves at central banks. Because of the  unknown potential for sovereign wealth funds to be motivated by political  instead of economic considerations, countries may seek to limit such  investments.
On February 27, 2008, the European Commission released a document  entitled A Common European Approach to Sovereign Wealth Funds  proposing that EU leaders endorse a common EU approach to increasing  the transparency, predictability, and accountability of sovereign wealth  funds. The International Monetary Fund (IMF) is also developing best  practices on how to manage sovereign wealth funds. According to the  IMF, sovereign wealth funds have existed since the 1950s, but their total  size worldwide has increased significantly in the last 10 to 15 years. The  IMF estimates that as of September 2007, total holdings of sovereign  wealth funds were between $2 trillion and $3 trillion, and may reach $10  trillion by 2012.
China, Russia, and the UAE all maintain sovereign wealth funds whose  worth is estimated in the billions of dollars. Japan has also proposed  establishing its own sovereign wealth fund, according to a private sector  representative. In Germany and France, specific concerns have been  raised about sovereign wealth funds investing in the two countries. In a  joint letter, the German Chancellor and the French President wrote to the  current President of the European Union Council in September 2007 to  request that attention be paid by the European Union to the manner in  which sovereign wealth funds can distort competition, as well as to call for  a code of conduct to be developed for hedge funds investing in Europe.  The letter emphasized that financial market transparency and appropriate  regulation and supervision of investors is necessary to avoid potential  negative results. Further, the German government is considering whether  to develop measures to address concerns about the implications of  sovereign wealth funds acquiring German companies.
Russian government officials told us that under the July 2007 version of  the proposed Strategic Sectors Law, state-owned enterprises and  sovereign wealth funds would require government approval and will not  be able to obtain a controlling share in certain strategic sectors. The U.S.  State Department has indicated that in the February 2008 version of the  draft, entities partially owned by a foreign government would face a 5  percent limit on unsupervised ownership. In December 2007, the Canadian  government issued new guidelines to clarify how the Investment Canada  Act applies to state-owned enterprises, including sovereign wealth funds.  Entities within the United Kingdom and the Netherlands have also  expressed concerns about foreign government-controlled investments, but  the governments do not currently have plans to revise their foreign  investment policies to address those concerns.

		Most Countries Specify Review Time Frames, Can Set Conditions on Approval, Specify Thresholds for Review, and Allow Appeals

Every country except China specifies time frames in which the review is to  be completed. Time frames tend to be between 30 and 60 days, and in  some cases the review may be extended up to 6 months. In Germany, a  transaction is automatically approved unless it is denied within 30 days of  application. In Japan, the time frame for review is also 30 days, but can be  extended up to 5 months. France’s review is required to be completed  within 2 months. In Canada, the review should be completed within 45  days, with the possibility of a 30-day extension. In India, approval should  be given within 30 days. However, a government official stated that, in  practice, the review usually takes 3 months. In Russia, the current anti- monopoly review time frame is 30 days, but national security reviews have  no set time frames. Reviews in the United Kingdom must be completed  within 6 months, although many are completed in 30 days. In several  countries, including Canada, France, and Germany, the review time frame  does not start until the reviewing body considers the application package  complete. As a result, the period from the initial application to the official  approval can be longer than the stated review period.
The requirement of an investor to meet certain conditions prior to official  approval of a transaction is common among six of the countries we  reviewed. These conditions, also referred to as undertakings,  contingencies, or mitigation agreements, were generally similar in each of  the countries. For example, a country may place national citizenship  requirements on an acquired company’s board members, or a company  may be required to maintain its defense contracts after an acquisition.  Examples of conditions imposed by the French government include (1)  guaranteed continuation of the activities of the company, (2) protection of  the companies’ research and development capabilities, and (3) guarantees  that the company will meet its obligations under its current procurement  contracts. In the United Kingdom, when foreign investors have acquired  companies that produced items for the military, those investors have been  required to agree to conditions related to the maintenance of strategic  capabilities. For example, when a U.S. defense company acquired a  defense company in the United Kingdom, the British government required  the acquiring company to agree to certain conditions related to the  protection of classified technology and information. We also found that  similar conditions have been required in Canada and Russia. Further,  some countries have required annual reporting by the investing companies  to ensure adherence to the mitigation agreements, and may require  divestment if the company does not adhere to the agreements.
Of the eight countries with a review process, six maintain official  thresholds for review, either dollar thresholds or a controlling or blocking  stake, which may be defined differently in each country. China reviews all  transactions at some government level. India requires government  notification for all investments, and does not specify monetary thresholds  for review. In Germany, an investor’s failure to comply with the  notification requirement may generate civil and criminal penalties.  Countries generally rely on the fear of reprisal, fines, or mandatory  divestment to encourage application and adherence to their review  process, rather than actively pursuing companies that do not file.
Unlike the United States, five countries allow judicial appeal of decisions  or have an administrative procedure to ask for reconsideration of a  decision made as a result of the review process. However, the appeals  processes are rarely used, primarily because the review processes rarely  result in a formal denial.

		Foreign Investment Is Affected by Factors outside Formal Processes

In practice, there are often informal or unofficial factors that may  influence the success or failure of a potential foreign investment. Certain  foreign investments may be considered sensitive by the host government;  therefore, a firm may informally contact the host government to discuss  the transaction prior to formal application for review. This was a common  practice in several of the selected countries. Seeking unofficial  preapproval can enable the potential investor to assuage any concerns the  host government may have about the pending transaction. Likewise, if a  host government is unlikely to approve a transaction, this can be  communicated to the investor prior to the formal application process. In  such a case, the investor may never apply for review because of unofficial  feedback from government officials concerning the likelihood of approval.  In other circumstances, a firm may withdraw its application for a review if  it receives unofficial feedback from the government that the transaction is  unlikely to be approved.
Although the laws and policies that regulate the review of foreign  investment are generally designed to be apolitical, for example, by basing  the review mechanism in an administrative component of the host  government, political influence in the public sphere may negatively affect  the outcome of an attempted investment. Regardless of the official policy  of the country, domestic politics play an important role in the review and  approval of foreign investment. This can add a measure of uncertainty to  the review process. According to the Organization for Economic Co- operation and Development (OECD), political pressure often occurs in  areas of policy that are loosely defined, such as protecting national and  cultural interests. Political figures may be able to block an investment on  these grounds.
While most governments support foreign direct investment in their  economy, in some instances the perceived economic impact of a particular  investment may still be a cause for concern. According to the OECD,  countries may attempt to mask this by citing national security  considerations or other legitimate national interests to block a foreign  investment transaction. The European Commission has reported to the  OECD that these reasons have been cited in several instances by European  Union member states to disguise economic or protectionist actions. In  some cases, host governments may seek to protect certain companies,  “national champions,” from external takeover or competition. National  champions may be protected from foreign acquisition through, among  other means, the public comments of political figures or the provision of  government assistance to aid a company in seeking an alternative  domestic merger partner.
The public may also react negatively to foreign investment. For example,  the 2006 Chinese mergers and acquisitions regulations allow competing  domestic firms to request that the Chinese government review a foreign  merger or acquisition for anti-trust concerns, a procedure that provides  Chinese companies a legal process to become involved in decisions about  foreign investment reviews of their competitors. Further, the public may  react negatively to the sale of local companies to foreign firms because  such sales may place a local region’s economy in the control of a foreign  entity. Local employees and residents may fear that foreign investment  will increase the likelihood of layoffs and other reductions in force. The  practice of foreign private equity firms purchasing a company to obtain its  assets, and then laying off or significantly restructuring the local  workforce so as to reap rapid profits through resale of the company, is a  concern, and has been referred to as “vulture” and “locust” capitalism in  Japan and Germany.

	Agency Comments and Our Evaluation

We requested and received written comments on a draft of this report  from the Department of the Treasury. The comments are included in their  entirety in appendix II of this report. In its letter, Treasury reemphasized  the commitment of the United States to an open investment policy and  stated that countries’ general investment policies and the relationship of  foreign investment reviews to those policies are important in  understanding investment review regimes. Treasury coordinated with  other CFIUS agencies in providing comments. Several agencies also  provided technical comments, which we have incorporated as appropriate.
We are sending copies of this report to the Chairman of the Senate  Committee on Banking, Housing, and Urban Affairs and to the Chairman  and Ranking Member of the House Committee on Financial Services. We  will also send copies to the Secretaries of Commerce, Defense, Treasury,  State, and the Office of the United States Trade Representative. We will  also make copies available to others upon request. In addition, the report  will be available at no charge on the GAO Web site at http://www.gao.gov.
Please contact me at (202) 512-4841 or calvaresibarra@gao.gov if you have  any questions regarding this report. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Appendix XIV lists the major contributors to this report.

Appendix I: Scope and Methodology

This report expands and updates a 1996 GAO report that compared the  laws and processes governing foreign investment in Japan, France,  Germany, and the United Kingdom.
To identify the relevant laws and policies for regulating foreign investment  in foreign countries, we selected a nongeneralizable sample of 10  countries based on the following criteria: the size of the reciprocal  investment relationship with the United States, a variety of investment  controls, regional diversity, prior GAO work in the subject area, and  congressional interest. We held in-country interviews in 5 of the countries  and collected basic information from officials in Washington, D.C., on the  remaining 5 countries.
We held in-country interviews with officials in    Canada,    China,    France,    Germany, and    Russia.
We collected basic information from officials in Washington, D.C., on     Japan,   the Netherlands,   the United Arab Emirates, and   the United Kingdom.
The information on foreign laws and regulations in this report does not  reflect our independent legal analysis, but is based on interviews and  secondary sources such as analysis by the U.S. Library of Congress and  our review of the laws in the original language, or translated copies of the  various foreign laws obtained from foreign government officials, foreign  government Web sites, or U.S. State Department sources. The U.S. Library  of Congress compiled a summary of the laws and policies relevant to the  regulation of foreign investment for each of the selected countries at our  request. We also interviewed and obtained information from U.S.  government officials from the Departments of the Treasury, Commerce,  State, and Defense; the Office of the U.S. Trade Representative; and the  Intelligence Community Acquisition Risk Center under the office of the  Director of National Intelligence. In addition to Washington, D.C., based  sources, we interviewed U.S. embassy representatives in Canada, China,  France, Germany, and Russia as well as the U.S. Mission to the European  Union. We also obtained information from U.S. embassy officials in India,  Japan, the Netherlands, the United Kingdom, and the United Arab  Emirates.
We interviewed or obtained information from foreign government officials  at each of the 10 embassies in Washington, D.C. For 5 of the countries---  Canada, China, France, Germany, and Russia--- we met with  representatives in various foreign government offices and discussed how  foreign investment is regulated.
We interviewed representatives from the European Commission in  Belgium and the Organization for Economic Co-operation and  Development (OECD) in France. We reviewed reports from the OECD, the  United Nations Conference on Trade and Development (UNCTAD), the  International Monetary Fund (IMF), and the Eurasia Group, among others,  to obtain information about foreign investment review processes, laws,  and policies, as well as basic figures for comparing foreign investment  inflows.
To identify how countries implement foreign investment regulations, we  interviewed a broad range of representatives for each of the selected  countries, including think tanks and other nongovernmental organizations,  business and trade associations, chambers of commerce, law firms, and  industry representatives that have invested in the selected countries, all of  whom possessed expert knowledge about foreign investment. In Canada,  China, France, Germany, and Russia, we interviewed representatives for  these organizations that were based in-country as well as in the United  States, while for India, Japan, the Netherlands, the United Kingdom, and  the United Arab Emirates, we only interviewed organizations, firms, and  businesses that had offices in the United States.
While our observations provide a cross section of various types of foreign  investment regimes, such observations are not representative of how all  countries regulate foreign investment. Further, as reporting standards for  foreign direct investment figures vary from country to country, we were  unable to obtain comparable country- and sector-specific foreign direct  investment-related data. We did obtain information and data available  through UNCTAD, IMF, and OECD. Finally, it is impossible to know the  full extent to which informal factors influence investment, and specifically  the process for reviewing foreign direct investment. Although there has  been significant cross-border investment, it is unknown how many  potential foreign investments were forgone or never pursued because of  the burden imposed by the regulations that were in place in a given  country. Official figures for denials and approvals were not available for  some of the countries we reviewed, and the figures that are available do  not necessarily represent the extent to which foreign investment  restrictions or barriers affect investment. Likewise, data do not exist to  determine the number of transactions initially pursued that were  withdrawn prior to receiving government approval.
We conducted this performance audit from December 2006 to February  2008 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: Comments from the Department of Treasury

Appendix III: Highlights of Recent Changes to Exon-Florio

On July 26, 2007, the President signed the Foreign Investment and National  Security Act of 2007 (FINSA) into law. FINSA amends section 721 of the  Defense Production Act of 1950, also known as the Exon-Florio  amendment. The following provides a summary of some of the more  significant changes to Exon-Florio, which became effective on October 24,  2007. FINSA provides that implementing regulations shall become effective  no later than April 21, 2008.

	The Committee on Foreign Investment in the United States

Prior to FINSA, Exon-Florio gave the President the authority to investigate  the impact of foreign acquisitions of U.S. companies on national security,  and by executive order the President delegated that authority to the  interagency Committee on Foreign Investment in the United States  (CFIUS). FINSA statutorily establishes CFIUS to carry out reviews and  investigations as well as other responsibilities assigned to it in the act or  delegated by the President. FINSA also defines the membership of CFIUS,  but allows the President to add the heads of other executive departments,  agencies, or offices. Table 4 shows pre- and post-FINSA membership of  CFIUS.

	Critical Infrastructure

Although transactions involving U.S. critical infrastructure were reviewed  and investigated by CFIUS in the past, Exon-Florio did not explicitly  provide for reviews or investigations of critical infrastructure. FINSA  specifically identifies critical infrastructure as an area of concern. For  example, FINSA explicitly requires CFIUS to investigate transactions that  involve critical infrastructure if the transaction could impair the national  security of the United States and the impairment has not been mitigated.  Also, FINSA specifically identifies the effect of a transaction on United  States critical infrastructure as a factor that must be considered by CFIUS  in conducting a national security review.

	Investigations

Prior to FINSA, Exon-Florio provided for a 45-day investigation to  determine the effects of a transaction on the national security of the  United States, and for a mandatory investigation in those cases in which  the acquiring company is controlled by or acting on behalf of a foreign  government and the transaction could affect the national security of the  United States. FINSA specifically provides for a 45-day investigation when  the lead agency responsible for negotiating mitigation agreements and  other conditions and for monitoring compliance with mitigation  agreements recommends an investigation and CFIUS agrees, or    whenever a review results in a determination that  the transaction threatens national security and the threat has not  been mitigated;  the transaction is a foreign government-controlled transaction; or  the transaction would result in control of critical infrastructure,  CFIUS determines that the transaction could impair national  security, and the impairment has not been mitigated.
However, FINSA also provides that an investigation is not required for  foreign government-controlled transactions or transactions involving  critical infrastructure if the Secretary of the Treasury and the lead agency  jointly determine that the transaction will not impair the national security  of the United States.

	Factors to Be Considered

FINSA has expanded the number of factors for CFIUS and the President to  consider in conducting reviews and investigations and making  determinations of whether a transaction poses a threat to national  security. Under FINSA, CFIUS and the President must consider, as  appropriate, the following additional factors:the potential national security-related effects on U. S. critical  infrastructure, including major energy assets;  the potential national security-related effects on U.S. critical  technologies;    whether the transaction is a foreign government-controlled transaction;    as appropriate, and particularly with respect to transactions requiring  an investigation, a review of the current assessment of  the acquiring country’s adherence to nonproliferation regimes;  the relationship of the acquiring country with the United States,  specifically on its record on cooperating in counterterrorism efforts;  and  the potential for transshipment or diversion of technologies with  military applications, including an analysis of national export  control laws and regulations;  the long-term projection of U.S. requirements for sources of energy and  other critical resources and material; and  the potential effects of the transaction on sales of military goods,  equipment, or technology to any country identified by the Secretary of  Defense as posing a potential regional military threat to the interests of  the United States.

	Mitigation Agreements

Prior to FINSA, neither Exon-Florio nor its implementing regulations  addressed the issue of mitigation agreements---agreements between CFIUS  or a member agency and the parties to the acquisition that are intended to  mitigate national security concerns. FINSA explicitly permits CFIUS or a  lead agency, as designated by the Treasury Department, to negotiate, enter  into, impose, and enforce any agreement or condition with any party to the  transaction to mitigate any threat to U.S. national security that arises as a  result of the transaction. FINSA also provides that a lead agency shall  monitor and enforce, on behalf of CFIUS, any mitigation agreement.

	Tracking Withdrawn Notices

Prior to FINSA, Exon-Florio contained no provisions for actions to be  taken in the event companies withdrew an official notification to CFIUS,  although the implementing regulations provided procedures to companies  on how to request a withdrawal. FINSA specifically provides for CFIUS to  establish, as appropriate  interim protections to address concerns raised during the review or  investigation,  time frames for the companies to resubmit notification to CFIUS, and    a process for tracking any actions the companies may take before the  companies resubmit the notification.

	Reporting to Congress

FINSA has expanded Exon-Florio’s requirement for reports to Congress.  Prior to FINSA, Exon-Florio required the President to submit a report to  Congress only when the President made a determination whether or not to  take action to block or suspend an acquisition using the authority of Exon- Florio. The report was required to address only the acquisition that was  the subject of the presidential determination. FINSA requires annual  reporting to specific congressional committees on all reviews and  investigations completed by CFIUS during the preceding 12-month period,  as well as a certified report on the results of any investigation shortly after  CFIUS concludes the investigation, unless the transaction under  investigation is sent to the President for a decision. FINSA also provides  for CFIUS to provide briefings to specific Members of Congress on any  transaction that has been concluded.

Appendix IV: Canada

Canada ranked sixth in terms of the average value of foreign direct  investment (FDI) inflows worldwide between 2000 and 2006.
In 2006, FDI in Canada totaled $385.2 billion, an increase of 81 percent  over FDI stock in 2000.
FDI stock in Canada as a proportion of gross domestic product (GDP)  was 30.4 percent in 2006.
Canada was the second most popular destination for U.S. FDI, behind  the United Kingdom as of 2006.

	Background

Canada became a self-governing dominion in 1867 while retaining ties to  the British crown. Canada is a constitutional monarchy with a federal  system, a parliamentary government, and democratic traditions. Criminal  law, based largely on British law, is uniform throughout the nation and is  under federal jurisdiction. Civil law is also based on the English common  law, except in Quebec, which has retained its own civil code patterned  after that of France. Justice is administered by federal, provincial, and  municipal courts.
For decades, foreign investment has been significant to Canada’s market  economy. The United States, the United Kingdom, France, and the  Netherlands are Canada’s largest foreign investors. At the end of 2006, the  stock of U.S. investment in Canada was $241 billion, about 61 percent of  total foreign investment in Canada. Economic sectors with a relatively  high foreign presence include manufacturing, oil and gas, wholesale trade,  transportation and warehousing, and finance and insurance. Recently,  merger and acquisition activity has been the largest part of foreign  investment flows into Canada, accounting for 71 percent of inward foreign  investment in 2005 and 2006, according to the Canadian government.
Canada is signatory to the World Trade Organization (WTO) Agreement  and the North American Free Trade Agreement (NAFTA). Under WTO and  NAFTA, Canada is generally required to provide national treatment and  most favored nation status so that foreign investors are treated no less  favorably than domestic investors with respect to the establishment,  acquisition, management, and sale of investments.

	Foreign Investment Laws and Policies

The Canadian government, through the Investment Canada Act (ICA),  provides for a foreign investment review process in order to ensure that  the investment is likely to be of “net benefit” to Canada. Under the ICA,  Canada’s investment review process is managed by Industry Canada and  led by the Minister of Industry. According to a Canadian government  official, in the late 1990s, the review of cultural investments was shifted to  Canadian Heritage under the direction of the Minister of Canadian  Heritage. Ministry officials review all cases and identify other government  ministries that need to be involved. For example, Industry Canada would  consult with Natural Resources Canada for an acquisition dealing with oil  or gas. All non-Canadians must file a notification with either Industry  Canada or Canadian Heritage when they begin a new business in Canada  or acquire an existing Canadian business. However, only transactions  whose asset value reaches certain thresholds require a review. The  relevant Minister of either Industry Canada or Canadian Heritage makes  the final decision on transactions.

	Sensitive Sectors and Criteria for Review

National security is not currently a part of Canada’s foreign investment  review process. Instead, the review considers a series of economic factors,  as well as national cultural policy objectives. While Canadian officials told  us that the ICA is not driven by national security, a number of laws,  regulations, and policies allow Canada to deal with national security  concerns stemming from foreign investments in certain sectors. Canada  requires government review and approval in uranium production, financial  services, transportation services (including pipelines), and cultural  businesses. However, there is no specific exemption for the petroleum  industry in the act. The financial sector is subject to ownership  restrictions, and foreigners are limited to 25 percent ownership of air  carriers, and 33 percent ownership in telecommunications companies. The  Department of Canadian Heritage reviews investments in businesses that  affect Canada’s cultural heritage, including the publication of books,  magazines, and newspapers as well as film and music production.
The factors assessed in the ICA review are (1) the effect of the investment  on the level and nature of economic activity in Canada, including  employment, resource processing, domestic sourcing, and exports; (2) the  degree and significance of Canadian participation in the business  enterprise and in the industry sector to which the enterprise belong; (3)  the effect on productivity, industrial efficiency, technological  development, innovation, and product variety in Canada; (4) the effect on  competition in Canada; (5) the impact of the investment on Canada’s  ability to compete in world markets; and (6) the compatibility of the  investment with national industrial, economic, and cultural policies, taking  into consideration industrial, economic, and cultural policy objectives of  any province likely to be significantly affected by the investment.

	New Developments

On June 20, 2005, the Canadian government introduced a bill to amend its  foreign investment review process. According to U.S. and Canadian  government officials, the proposed bill included provisions to allow the  government to review foreign investment based on national security  concerns. The proposed law did not define national security and would  have required the responsible minister to recommend a review, according  to Canadian government officials. In addition, a transaction would have  been reviewed only if it came to the attention of the intelligence or defense  communities and they determined that it needed to be reviewed.  According to U.S. government officials, this bill was partially driven by  concerns about recent attempts by Chinese firms to acquire Canadian  natural resource assets. However, the Canadian Parliament was dissolved  at the end of 2005 prior to the 2006 election, and the bill was never passed.
In 2006, the Department of Finance Canada issued Advantage Canada, an  economic planning document stating that the Canadian government would  review its foreign investment policy framework, including the Investment  Canada Act, with the goal of maximizing the benefits of foreign investment  for Canadians while retaining its ability to protect national interests. The  Canadian government has stated that there may be rare occasions where a  particular foreign investment might damage Canada’s long-term interests.  For example, foreign investment by state-owned enterprises with  noncommercial objectives and unclear corporate governance may not be  beneficial to Canadians. Further, the Minister of Industry stated in October  2007 that the Canadian government’s concern is to ensure that state-owned  enterprises in Canada are operating under the same standards as any other  commercial enterprise in Canada, including those related to transparency,  good governance, and free market principles. In December 2007, the  Canadian government issued new guidelines to clarify how the Investment  Canada Act applies to state-owned enterprises, including sovereign wealth  funds.
In July 2007, a Competition Policy Review Panel was created by the  Canadian government to review key elements of Canada’s competition and  investment policies. The panel is to consider whether or not the  government should develop new rules to protect Canada’s national  interests. The panel is expected to report to the Minister of Industry by  June 30, 2008 with recommendations. The government of Canada is also  separately examining the need for a mechanism to screen foreign  investment on the basis of national security. According to a paper issued in  October 2007 by the Competition Policy Review Panel, while Canadians  have always been concerned about foreign influence on the Canadian  economy, this concern has been exacerbated by a recent series of  significant takeovers of a number of prominent Canadian firms by foreign  investors, including mining companies like Falconbridge and Inco.

	Review Process

The ICA review process begins when a company submits an application.  The application must be filed at any time prior to the implementation of  the investment. The application requires information about the investor,  the investment, the Canadian business to be acquired, its assets, and the  investor’s plan for the Canadian business. In the application, companies  also can take the opportunity to give their reasons why the minister should  approve the transaction, according to Canadian government officials and  private industry representatives. The ICA includes confidentiality  provisions to protect the privileged information provided by the  businesses through the course of the application process. Once the  application is found to be complete, the Canadian government has 45 days  to determine whether or not to approve a particular transaction. If the  government does not send a notice to the applicant within 45 days, the  application is considered approved. The Ministers of Industry and Heritage  each have the option of extending the review by 30 days. Further  extensions are permitted by agreement between the investor and the  minister. According to the Canadian government, over the period from  2003 to 2007, the average length of an Industry Canada review was 52 days.  The average Canadian Heritage review will usually take at least 75 days to  complete.
The review includes the following steps:  1.  Government officials verify the application is complete.  2.  Case officers share certain information with relevant government  offices, both federal and provincial, and with the Competition Bureau.  3.  Industry Canada and/or Canadian Heritage discuss the results of the  review with the investor.

		Conditions for Approval

To be granted approval for a transaction, investors must demonstrate that  their investment will likely be of net benefit to Canada through their  business plans and the conditions for approval, also called undertakings,  which they negotiate with the Canadian government. The conditions for  approval generally focus on future plans for the business following the  completion of the transaction. According to the Canadian government,  there has been a shift over time toward conditions related to productivity,  technology transfer, and efficiency, and away from a focus on  employment. Common conditions for approval might include the  following:    Canadian participation on the acquired company’s board, usually 25    Canadian participation in the acquired company’s management;   research and development expenditures;    employment levels;    productivity improvements; and     exploration expenditures for transactions involving mining.

Appendix V: China

China is the third largest recipient of FDI in the world, ranking behind  the United States and the United Kingdom in terms of the average value  of FDI inflows between 2000 and 2006.
In 2006, FDI in China totaled $292.6 billion, an increase of 51 percent  since 2000.
FDI stock in China as a proportion of GDP was 11.1 percent in 2006.

	Background

Over the last several decades, China’s economy has moved from a  centrally planned system that was largely closed to international trade to a  more market-oriented system. Since 1978 China’s GDP has increased more  than 1,000 percent. According to U.S. State Department officials, the  development of Chinese investment regulations has not kept pace with the  development of its markets, and the complexity of the foreign investment  review process reflects vestiges of China’s past as a planned economy.  Since the period of economic reform began, China has continued to review  inward investment to ensure proposed projects conform to China’s  industrial policy and national interests. Foreign investment in China  typically began in the form of equity joint ventures in the manufacturing  sector and, according to industry officials, has progressed to the point  where foreigners can merge with or acquire entire Chinese companies.
Several Chinese government entities are involved in the review of foreign  investment, including the following:    State Council: The State Council is China’s chief executive and  administrative authority. Members include the Premier, as the head of  government; a variable number of vice premiers; 22 ministers; and 4  State Council commission directors.
National Development and Reform Commission (NDRC):  The NDRC  is the State Council’s economic policy planning arm. According to U.S.  and industry officials, it is a powerful macroeconomic management  agency with broad planning control over the Chinese economy, and  specific control over heavy industry. U.S. and industry officials have  stated that the NDRC is deeply involved in the review of foreign  investment transactions.
Ministry of Commerce (MOFCOM): MOFCOM is under the State  Council and is charged with managing China’s external economic  relations. Its duties include formulating trade policy, regulating foreign  participation in markets, implementing import and export quotas,  implementing trade and economic cooperation policies, and guiding  foreign investment.
State-owned Assets Supervision and Administration Commission  (SASAC): SASAC is a commission under the State Council that  represents the central government’s ownership interests in 159 state- owned enterprises (SOE). As part of its duties, SASAC guides SOE  reform, drafts laws and regulations on SOE management, and  supervises the preservation of SOE value.
State Administration for Industry and Commerce (SAIC): SAIC is a  State Council ministry in charge of supervising market competition,  investigating illegal trade, regulating contract performance, and  handling trademark registration and administration.

	Foreign Investment Laws and Policies

According to Chinese officials, China’s system of written law can be  broken into different categories according to their level. Chinese laws that  are broad and general form the highest level. They are passed by the  Chinese legislative body, the National People’s Congress, during its annual  meeting in Beijing. At the next level are regulations that are issued by  individual state ministries and are intended to interpret and characterize  laws. Below that are guiding opinions. According to Chinese officials,  opinions are not binding and are used as planning documents. However,  according to one U.S. official, they are assumed to carry the weight of law.  According to Chinese officials, since Chinese laws are broad and general,  regulations and guiding opinions provide the real substance of the Chinese  legal system.
In 2006, China began to adopt laws and regulations to describe the  procedures it uses to review, and potentially block, proposed foreign  acquisitions that it deems are not in China’s national interest. According to  Chinese officials, two regulations provide the primary framework for  China’s foreign investment review. First, the 2006 Provisions for Merger  and Acquisition of Domestic Enterprises by Foreign Investors (the 2006  regulations) are the most important rules for managing foreign  investment. According to the Organization for Economic Co-operation and  Development, these regulations bring China closer to international norms  for foreign investment reviews and increase regulatory transparency.
The 2006 regulations establish the need for government approval of foreign  investment if the transaction    affects national economic security,  involves a major industry, or  results in the transfer of famous trademarks or traditional Chinese    brands.
If foreign investors fail to apply for approval, the Chinese government has  the legal authority to force divestiture if a transaction causes or may cause  significant impact on China’s economic security.
Second, the Chinese Catalog for the Guidance of Foreign Investment  Industries (the Catalog) restricts foreign investment in specified sectors.  A revised version of the Catalog was issued by the NDRC in November  2007. According to Chinese officials, the Catalog is a reflection of  industrial policy and is intended as a guide for foreign investors. It assigns  industry sectors to one of three categories: “encouraged,” “restricted,” and  “prohibited.” Investment in unlisted sectors is automatically considered  “permitted.”
According to the U.S. Investment Climate Statement on China, the Catalog  prohibits foreign investment in sectors that China views as key to its  national security. However, the Catalog does not prohibit investment for  stated reasons, or define national security, although some industries  clearly fall into that category, including weapons and ammunition  manufacturing, mining and processing of radioactive materials and rare  earth metals, and construction and operation of power networks. Other  sectors are prohibited based on a broader definition of national security,  including film, television, book publishing, and other media production.  Other prohibited sectors appear completely unrelated to national security,  including processing special Chinese teas, preparation of traditional  Chinese medicines, and production of enamel products and rice paper.  According to U.S. and Chinese government officials, foreign investment in  certain sectors may be encouraged if the investment would bring advanced  technology into China that would benefit China’s future economic  development. Further, according to a U.S. State Department official,  industry representatives have stated that China intends to restrict or ban  foreign investment in sectors deemed strategic or sensitive to economic  security.

	Additional Foreign Investment Laws and Policies

Other Chinese laws, regulations, and opinions also regulate foreign  investment. However, only the Anti-Monopoly Law does so explicitly for  national security.
The State Council’s Opinions on Revitalizing the Industrial Machinery  Industry: Suggests that “large, key and backbone equipment  manufacturers” obtain government approval when transferring a  “controlling stake” to foreign investors. It also calls for China to expand  the market share of domestic companies in 16 equipment- manufacturing fields.
The Guiding Opinion Concerning the Advancement of Adjustments of  State Capital and the Restructuring of State-Owned Enterprises: Lists  seven sectors the government deems critical to the national economy,  which must be kept under government control, including defense,  power generation and distribution, oil and petrochemicals,  telecommunications, coal, aviation, and shipping.
The Anti-Monopoly Law: Adopted in August 2007, and becomes  effective in August 2008. The law creates an antitrust review of foreign  and domestic mergers and acquisitions and also orders the government  to create a process to review inward investment for national security  concerns. As of January 2008, implementing regulations for the law had  not been released.
Three overarching laws guide foreign investment: The Equity Joint  Ventures Law, the Foreign Contractor Joint Ventures Law, and the  Foreign Capital Enterprises Law. However, since Chinese laws are very  general, the implementing regulations associated with each of these  laws are more important for understanding foreign investment  controls.
According to Chinese officials, China has other industry- and sector- specific laws to control foreign investment; for example, in  telecommunications or financial services. In total, China has more than  200 laws and regulations that involve foreign investment.

	Review Process

China has a nominal process for reviewing all foreign mergers and  acquisitions. The standards that China uses to conduct reviews of foreign  investment are opaque, and have resulted in a system that is not fully  transparent. However, it is clear that in addition to national security  concerns, they also include an assessment of whether a given investment  conforms to China’s economic development plan. Various factors make  China’s foreign investment review process unpredictable in practice.  Factors affecting the review process include (1) competitor firms  generating negative public attention that may influence relevant officials,  (2) bureaucratic infighting, (3) differences in priorities between the local  and central level Chinese government related to their motivations for the  approval of foreign investment, (4) the Chinese political calendar, and (5)  regulatory ambiguity and lack of procedural transparency. All five factors  can affect the outcome of a particular review, resulting in an application  process that is unpredictable for investors. In addition, China’s foreign  investment regulations are considered complex, in transition, and lack  definitions for key terms, making the review process ambiguous.
According to Chinese officials, there is one review process with many  facets, and all transactions must go through the Ministry of Commerce.
Step 1: All foreign investors must apply to the local or provincial-level  Ministry of Commerce when attempting to merge with or acquire a  Chinese firm.
Step 2: Most small transactions are reviewed and approved by the local-  level Ministry of Commerce and then go to the local- or provincial-level  government for registration and licensing. (Step 6.) If the local MOFCOM  does not submit the review to the national-level MOFCOM, then it will  distribute the application to the local subsidiaries of NDRC and SASAC,  etc. These local subsidiaries may then forward the review to their national- level representatives if they find something of concern. (Step 4.)
Step 3: The central-level Ministry of Commerce reviews large or politically  sensitive transactions. Factors affecting political sensitivity might include  the size of the transaction, whether a state-owned enterprise is involved,  whether the sector itself is sensitive, and whether actors involved in the  transaction are connected to the State Council. At this point, the central-  level Ministry of Commerce acts as the administrative coordinator for the  review.
Step 4: Other relevant actors provide “preapproval.” This step generally  determines whether or not a transaction will be approved. The NDRC  plays an important role in the review as the lead economic planning  agency, as does SASAC in cases involving Chinese state-owned  enterprises.
Step 5: The central-level Ministry of Commerce reviews the application  and provides the official approval or denial. If another governmental entity  has jurisdiction, the Ministry of Commerce will rely on it to determine  approval or denial. Within 6 months of a transaction being approved, the  Ministry of Commerce issues a certificate of foreign investment.
Step 6: Once the central-level Ministry of Commerce issues a certificate of  foreign investment, the foreign company has 1 month to obtain a business  license and register the business with the State Administration of Industry  and Commerce.
China’s foreign investment review process is unpredictable. While the  great majority of transactions are cleared without incident, the review’s  multiple layers and ambiguous standards allow intervention by parties  opposed to a transaction, according to U.S. State Department officials. For  example, the 2006 regulations state that domestic competitors of the  Chinese firm being acquired can request that the Chinese government  review a transaction for anti-trust concerns. According to U.S. and  industry officials, domestic competitors can also indirectly affect  transactions by generating negative public attention around a deal that  could then affect decision makers. For example, when a U.S. private equity  firm attempted to purchase 85 percent ownership of a construction  machinery company, the chief executive officer of a rival Chinese firm  stated that selling the company to a foreign firm was not in China’s  interest, and he reportedly worked to derail the transaction. Recently this  type of interference has become more common.
A second factor that can slow approvals is bureaucratic infighting.  According to U.S. and industry officials, a number of Chinese  bureaucracies have overlapping jurisdictions and competing interests,  which can affect the outcome of a particular review. For example, Chinese  officials in the Ministry of Commerce and the State Administration of  Industry and Commerce both suggested they conducted anti-trust reviews,  but, according to U.S. State Department officials, there appears to be little  coordination of their efforts. This overlapping claim is indicative of the  lack of clarity regarding what governmental bodies are involved in a given  review.
A third factor that can affect approvals is the difference in incentives  between the local and central level Chinese government when approving  foreign mergers and acquisitions. According to U.S. government officials,  there is a split between the central government, which is concerned about  implementing social policies, and the local governments, which are more  concerned with economic growth, providing jobs, and attracting  investment. Since local governments have a large degree of influence in  the approval process, they are one of the major forces counteracting  protectionist tendencies in China.
A fourth factor is the Chinese political calendar. According to U.S. and  industry officials, foreign firms can have increased difficulty getting  government approval for mergers and acquisitions in the year preceding a  Chinese Communist Party congress. The Chinese Communist Party  convenes a party congress approximately every 5 years. At these events,  the party decides its future policy positions and selects new leadership.  According to U.S. and industry officials, the atmosphere preceding a party  congress is politically charged. Since the appearance of appeasing  foreigners can have negative political repercussions in the Chinese  political system, many Chinese officials are apprehensive about approving  any foreign investments during this time. In particular, since most top  executives at state-owned enterprises are party members, investments that  affect powerful vested interests, particularly in state-dominated sectors, or  those that risk being viewed as contrary to central government policies,  are more likely to face political interference according to the U.S. State  Department.
In addition to those factors, according to U.S. officials and industry  representatives, the relationships among various laws and regulations are  complex and unclear. This lack of clarity lessens the ability of foreign  firms to predict the likelihood of government approval of an investment.  For example, Chinese officials stated that the 2006 regulations and the  Catalog provide the primary regulatory framework for reviewing and  regulating foreign investment. However, they could not articulate the  relationship between the two other than to say that the Catalog is one of  many factors considered in the review process. Moreover, according to a  U.S. government official, Chinese laws tend to be vaguely worded and  general in nature. This allows implementing ministries leeway in  interpreting these measures. Implementing rules sometimes offer  clarification. Further, according to the Organization for Economic Co- operation and Development, the 2006 regulations appear to create a new  layer of review, in addition to the examination and approval process based  on the Catalog.
In another example, the State Council Opinion on Revitalizing the  Industrial Machinery Industry calls for China to expand the domestic  market share in 16 equipment-manufacturing fields. The Guiding Opinion  Concerning the Advancement of Adjustments of State Capital and the  Restructuring of State-Owned Enterprises lists seven sectors the  government deems critical to the national economy, which must be kept in  the state’s hands. However, it is unclear how these opinions are related to  the review process. A Chinese official from the commission that  promulgated the list stated that it would be more difficult for a foreign firm  to purchase a Chinese company in one of those sectors. However, another  Chinese official did not view the list as important because it is nonbinding.
The Chinese government has not defined key terms in the 2006 regulations,  contributing to a lack of transparency in the review process. The updated  regulations add a screening requirement if the foreign investment  transaction affects “national economic security,” involves a “major  industry,” or results in the transfer of “famous trademarks” or “traditional”  Chinese brands. However, the regulations do not define these terms,  making it difficult for businesses to determine when screening is required  and when it is not.
According to U.S. government and industry officials, the definition of  “national economic security” is particularly unclear. In fact, according to  an industry official, the Ministry of Commerce has not publicly used  national economic security as a reason for preventing a foreign merger or  acquisition. According to the U.S. State Department, some Chinese  scholars affiliated with more protectionist factions of the government use  national economic security to refer to self-sufficient economic growth.  Thus, investment that would lead China to become dependent on foreign  participation in the economy to sustain economic growth should be  restricted. Other Chinese scholars believe national economic security  refers to economic development that promotes stability, such as a  continued increase in living standards, progress on environmental  protection, and the creation of jobs. Since China’s leaders see economic  development as key to maintaining internal stability, national security and  national economic security are treated as equally important, according to  Chinese and U.S. officials. In practice, the sectors China considers  important to national security are listed as forbidden in the Catalog.
Confusion over new regulations is common. According to industry  representatives, the Chinese government sometimes promulgates a  regulation that many, including those in the government charged with  implementing the regulations, do not understand. Implementing  regulations are key to spelling out the details of a law, but may be released  after the law takes effect. When this occurs, the business community  attempts to determine the parameters of the law or regulation through trial  and error. Over time, the regulation will take shape. Accordingly, a U.S.  State Department official said the lack of definitions and transparency in  the 2006 regulations could be indicative of disagreements within the  Chinese government regarding how to regulate foreign investment.  Conversely, other U.S. and industry officials stated that the updated  regulations are intended to allow the government discretion to restrict  foreign investment when it is in its interest to do so.

	Recent Developments

According to U.S. and industry officials, several factors may have  contributed to a slowdown in foreign investment approvals and activity  starting in mid-2006. These factors include pragmatic concerns by the  Chinese government about the appropriate level of foreign investment and  protectionist concerns commonly characterized as economic nationalism.  As the Chinese government has promulgated new regulations, industry  uncertainty has grown regarding China’s review process. However,  according to U.S. officials, it is impossible to know whether the current  slowdown in approvals will continue or if it is merely associated with  temporary political conditions. Nevertheless, according to U.S. and  industry officials, the long-term trend toward improved regulatory  transparency and efficiency remains positive.
Factors cited as affecting the review process and foreign investment  activity include the following:    Rapid rise in foreign investment:  Foreign mergers and acquisitions  increased from 4 percent of foreign investment in 2002 to over 11  percent in 2005. According to U.S. and industry officials, some Chinese  government officials are concerned about increased foreign control  over China’s economy.
Historical antecedents:  Large-scale foreign ownership of Chinese  companies can appear to the Chinese as foreign encroachment,  drawing on historical fears of foreigners taking control of their country.
Populist perceptions of foreign investment: According to U.S. and  industry officials, many people in China believe their country has sold  vital state-owned enterprises and traditional Chinese brands to  foreigners at below-market value. They fear China will lose its best  companies to foreigners. In addition, they perceive that many foreign  countries would not sell similar assets to Chinese companies.
High-profile transactions: The U.S. State Department has reported  that senior Chinese officials frequently point to the failure of China  National Offshore Oil Corporation’s (CNOOC) attempt to purchase the  U.S. oil company Unocal as justification for China’s new investment  screening mechanisms. Later, a U.S.-based company’s attempted  purchase of a Chinese machinery company led to a public outcry  against foreign acquisitions in China.
Competitor’s interventions: Chinese businesses are becoming more  adept in using domestic media to generate opposition to inward  investment that threatens their businesses.
Desire to build world-class companies: According to Chinese and U.S.  officials, the Chinese government wants to develop world-class  companies that can compete internationally. This includes developing  famous Chinese brands so that Chinese firms can retain a larger share  of the profits from products they manufacture. The government would  likely oppose foreign takeovers of these companies.
New regulations: In June 2006 the State Council released an opinion  defining machinery and capital equipment as pillar industries, and  stating that selling key enterprises to foreigners will require its  approval. In December 2006 SASAC released its list of seven sectors  the government deems critical to the national economy. In August 2007  the National People’s Congress promulgated the Anti-Monopoly Law,  adding a national security examination to China’s review process.
Change in industrial policy: In November 2006 the Chinese  government released its 11th 5-year plan on foreign capital utilization,  wherein it emphasized a shift from “quantity” to “quality” of foreign  investment, including plans to restrict environmentally damaging and  energy inefficient investments. Chinese Vice Premier Wu Yi said the  shift in emphasis had also occurred because China had rectified its  capital deficiency.
Macroeconomic controls: Investment contributes an unusually large  proportion of China’s economic growth. Overcapacity may be building  in some sectors, and the government is seeking to slow investment  generally, according to U.S. State Department officials.
Currency stability: Chinese government concerns exist about  excessive foreign exchange inflows that could affect the appreciation  of Chinese currency and money supply growth.
Political season: In October 2007 the Chinese Communist Party held its  Party Congress. According to U.S. and industry officials, government  officials were hesitant to approve foreign mergers or acquisitions  during the months leading up to the Party Congress. Large or politically  sensitive deals were especially subject to being delayed, according to  U.S. officials and industry representatives.
Other factors: The equalization of tax rates for foreign and domestic  enterprises, the impact of rising labor costs, and the influence of  regulatory issues such as the new labor contract law.

Appendix VI: France

France ranked fifth in terms of the average value of FDI inflows  worldwide between 2000 and 2006.
In 2006, FDI stock in France totaled $782.8 billion, an increase of  approximately $523 billion since 2000.
FDI stock in France as a proportion of GDP in France was 35 percent  in 2006.
The United States is the leading investor in France, followed by  Germany and the United Kingdom.

	Background

France, as a member of the European Union, is subject to the articles of  the European Community Treaty (EC Treaty). The articles relevant to  foreign investment include the requirement that EU member states allow  the free movement of capital, as well as allow investors from other  countries to conduct business within the member state unencumbered.  However, under the EC Treaty, EU member states retain the right to  impose restrictions on foreign investment based on public security  considerations, as long as those restrictions do not result in arbitrary  discrimination or a disguised restriction on trade.

	Foreign Investment Laws and Policies

France regulates foreign direct investment for national security  considerations through Decree No. 2005-1739, which implements Article L.  151 of the French Monetary and Financial Code. The 2005 Decree lists 11  specific sectors subject to foreign investment regulation on the grounds of  defending France’s public order, public safety, or national defense  interests, as well as introduces a distinction between EU investors and  non-EU investors, with a less restrictive regime applicable to the former.
According to the French Monetary and Financial Code, financial dealings  between France and foreign countries are unrestricted. However, certain  exceptions to this general policy relate to the regulation of foreign  investment for national security considerations. The code states that the  French government may require a range of foreign exchange transactions,  which includes mergers, acquisitions, and other types of foreign  investment, to be subject to prior approval by the French government if  they may jeopardize public order, public safety, or national defense  interests. In addition, foreign investment in the research, production, and  marketing of arms, munitions, or explosives is also subject to prior  approval. Approval may be granted by the government based on  conditions. Failure on the part of the investor to agree to these conditions  may result in approval for the investment being denied.

	European Court of Justice Ruling in 2000 Led to Current Regulations

In 2000, in a case brought before the European Court of Justice (ECJ), the  ECJ ruled that France had violated the EC Treaty provisions on the free  movement of capital. France had restricted the transfer of funds from  abroad to the French Church of Scientology, on the grounds that French  public security interests were at stake. At the time, French law required an  advance authorization for any foreign investment that might present a  threat to public security-–a requirement the ECJ found to be overly  broad. As a result, France promulgated Decree No. 2005-1739, which  implements Article L. 151-3 of the French Monetary and Financial Code, in  December 2005.
The French decision to include gambling/casinos as one of the specified  sectors subject to review, as well as the distinctions made between EU  and non-EU investors, has caused further tension between France and the  European Commission. The European Commission began infringement  proceedings, and in October 2006, formally asked France to amend its  regulations. As of February 2008, France had made proposals to address  the European Commission concerns, and discussions are ongoing.

	Review Process

France’s Ministry of Economy, Finance, and Employment leads the foreign  investment review process. This ministry seeks input from various other  ministries, including the Ministry of Defense, and issues an approval or  denial based on the input of all government reviewers. Failure to apply for  a national security review when required can result in criminal and civil  penalties. If investors are unsure whether the proposed investment is  subject to review they may request an opinion from the Ministry of  Economy, Finance, and Employment. The ministry has 2 months to  respond to the investor. However, the decree notes that a lack of response  on the part of the ministry within the specified time frame does not release  the investor from the review requirement.
The decree states that a review of an investment within a sensitive sector  must be conducted if the investor will    acquire “control” of a firm whose corporate headquarters are located in  France,    acquire a branch of a firm whose corporate headquarters are located in    acquire more than one-third of the capital or voting rights of a firm  whose corporate headquarters are located in France.
These conditions apply to investment from a non-EU company. Investment  from a company that is based in the EU is subject to review when  investing within a sensitive sector in France only when meeting one of the  first two conditions above for the last four sectors listed below, and only  when meeting the second condition for the first seven sectors of the list.
The decree defines the following sectors/activities as sensitive for  purposes of a national security review:  1.  gambling and casinos;  3.  research, development, or production of means to stem the unlawful  use, in terrorist activities, of pathogens or toxins;  4.  equipment designed to intercept correspondence and monitor  5.  testing and certification of the security of information technology  6.  production of goods or supply or services to ensure the security of  the  7.  dual-use items and technologies;  8.  cryptology equipment and services;  9.  activities carried out by firms entrusted with national defense secrets,  in particular under the terms of national defense contracts or of  security clauses;  10. research, production, or trade in weapons, ammunitions, powders, and  explosives intended for military purposes or war materials;  11. activities carried out by firms holding a contract for the design or  supply of equipment for the Ministry of Defense, either directly or as  subcontractors, to produce an item or supply a service for one of the  sectors referred to in points 7 through 10 above.
Companies based in an EU member state are subject to the same scope of  sectors/activities for 8 through 11 above as a non-EU state, but a more  refined scope for sectors/activities 1 through 7 above.
The investor is asked to provide  the location where the investor is a legal entity;    details on the individuals and public legal entities that have ultimate  control over the investing organization;  the identity of the primary known shareholders holding more than 5  percent of the capital or voting rights;  the board members’ names and addresses;  if the investor is an investment fund, the identity of the fund  manager(s);  the investment target’s business activity;  the investment target’s last fiscal year revenues; and  the shareholder structure before and after the contemplated deal.
If the Ministry of Economy, Finance, and Employment does not complete  its review and respond within 2 months, then the transaction is considered  to be automatically approved. However, the 2-month time frame only  begins once a complete application is submitted. If more information from  the investor is needed, the review period can be extended. According to  French government officials, the Ministry of Economy, Finance, and  Employment maintains an open dialogue with the investor so that the  ministries reviewing a transaction can be assured of a complete  understanding of the proposal. According to French government officials,  during the approval procedure, informal consultations between the  investor and the French government may take place. During this informal  consultation, the investor may revise the proposal to obtain approval.
The decree states that the Ministry of Economy, Finance, and Employment  may determine whether security concerns can be mitigated by attaching  one or more conditions to the approval of a transaction. For example,  according to French officials, the government might require that the  investor commit to fulfill ongoing contracts or obligations of the target  firm, particular sensitive technologies be kept within France, or aspects of  a company’s business that require the use of classified information be  limited to French citizens. Half of the cases reviewed in 2006 included  mitigation agreements. According to government officials, it is common to  require the investor to submit an annual report to the government  confirming adherence to the agreement. Depending on the sector involved,  the ministry with industry jurisdiction oversees the enforcement of  commitments by the investor.
In the event that the Ministry of Economy, Finance, and Employment does  not approve the transaction, the investor has the right under French law to  appeal the decision in the French administrative courts. If the investor can  demonstrate that the ministry failed to apply French law correctly, the  negative decision may be overturned. In addition, the investor could  challenge the decision before the European Court of Justice if EC Treaty  provisions are thought to have been violated. According to French  government officials, there has never been a denial, and consequently,  there have been no appeals under the decree since it was promulgated in  December 2005.
According to lawyers experienced with foreign investment policies in  France, an important part of the application process for businesses is  regularly following up with the Ministry of Economy, Finance, and  Employment to check on the status of the application as it works its way  through the review process. In a particularly sensitive deal, the investor is  likely to hire advisers to contact the government to determine the  likelihood of approval even before submitting an application for review.  Lawyers and French government officials both stated that as a result of the  explicitness of the decree, the French system is deemed to be relatively  predictable and transparent for businesses because it is clear in the decree  what is subject to review. U.S. government officials told us that they have  not received any major complaints from U.S. businesses about French  foreign investment policies or review procedures.

	Other Foreign Investment Laws and Policies

In addition to the decree’s requirements, France has a number of single-  sector restrictions. For example, non-EU media companies are restricted  from acquiring more than a 20 percent stake in French-language  audiovisual communications and media companies, and foreign  investment in the French banking and insurance sector requires approval  from French banking and insurance regulators. The French government  also reserves the right to restrict foreign-controlled enterprises in the  aerospace sector. Finally, a number of public monopolies exist in France  that are not open to investment, including atomic energy, railway  passenger transport, coal mines, gunpowder and explosives, and certain  postal services.

	Recent Developments

According to a senior French government official, France is not  philosophically opposed to foreign investment by foreign state-owned  enterprises. However, it is informally considered in the investment review  process. For example, the percentage of the investor that is owned by a  foreign government would be taken into consideration. However, France  does not have any laws or policies that specifically restrict state-owned  enterprises or sovereign wealth funds from investing in France.
A growing concern in France is related to energy infrastructure security.  For example, in June 2007 the French Parliament issued a report stating  that the French government should consider whether energy should be  added to the list of sectors in the decree that require government review  and approval. As of February 2008, there was no legislation being  discussed that provides for such an addition to the decree. A senior  French government official also noted that while the use of French  government golden shares is not targeted at foreign investors, the French  government could use such a share to oppose any measure that might  jeopardize the security of energy supplies---potentially including the  purchase of French energy infrastructure by foreign state-owned  enterprises, private hedge funds, or sovereign wealth funds.

Appendix VII: Germany

Germany ranked fourth in terms of the average value of FDI inflows  worldwide between 2000 and 2006.
In 2006, FDI in Germany totaled $502.4 billion, an increase of 85  percent over FDI stock in Germany in 2000.
FDI stock in Germany as a proportion of GDP was 17.4 percent in 2006.
The United States is the third largest investor in Germany.

	Background

Germany, as a member of the European Union, is subject to the European  Community Treaty, including the requirement that EU member states  allow the free movement of capital. EU members must also allow investors  from other countries to conduct business within the member state  unencumbered. However, under the EC Treaty, EU member states retain  the right to impose restrictions on the free movement of capital based on  public security considerations, but these restrictions must not result in  arbitrary discrimination or a disguised restriction in trade.

	Foreign Investment Laws and Policies

In Germany, as a general rule, foreign investment is not restricted by the  government. However, in 2004 Germany enacted Section 7 of the German  Foreign Trade and Payments Act, which established exceptions to the free  movement of foreign investment into Germany for the “protection of  security and external interests.” Specifically, foreign investment may be  restricted to guarantee the essential security interests of the Federal  Republic of Germany, prevent a disturbance of the peaceful coexistence  between nations, or prevent a major disruption of the foreign relations of  the Federal Republic of Germany. The act specifies that foreign  investment transactions are subject to review if the transaction involves a  German company that produces or develops war weapons and other  military equipment, or produces cryptographic systems for the  transmission of classified information.
German government officials told us that the catalyst for the 2004  amendments was the 2003 purchase of a majority stake in a German  submarine manufacturer by a U.S. private equity investment firm.  According to these officials, there was uncertainty whether existing  German export control laws were adequate to protect German national  security interests, and the government did not posses the legal means to  block such transactions. For example, the German government feared that  a foreign company could purchase a German company possessing  sensitive technologies, after which the investor could take the sensitive  technology out of Germany and out of the purview of German export  control laws.
After passage of the 2004 amendments to the act, the Federal Ministry of  Economics and Technology issued implementing regulations specifying  which transactions were subject to review. These included the acquisition  of German companies, or the direct participation in such companies, that  produce or develop items specified in Germany’s War Weapons Control  Act, such as    missiles and rockets;    combat aircraft and helicopters;    vessels of war and special naval equipment;    combat vehicles;    barrel weapons (guns, cannons, howitzers, mortars, etc.);  light anti-tank weapons, military flame throwers, mine laying and  throwing devices;  torpedoes, mines, bombs, explosives, etc.;  related accessory and ancillary items; and  laser weapons.
Acquisitions of companies that produce certain cryptographic systems are  also subject to review under the implementing regulations of Section 7 of  the act. Further, in September 2005, the German government added  acquisitions of specialized engine and gear manufacturers to the list.  According to lawyers experienced with foreign investment policies in  Germany, this change occurred in response to the proposed sale of a  German defense firm.

	Review Process

The review of foreign investment in Germany is conducted by the Federal  Ministry of Economics and Technology, which obtains input from the  Ministry of Defense and the Ministry of Foreign Affairs, among others, on  whether there are national security concerns. If the transaction involves a  cryptography company, for example, the Ministry of the Interior and  German intelligence services would also be involved with the review. The  ministry may prohibit a given acquisition if the reviewing officials  determine that there would be an essential security interest at stake if the  transaction were to be allowed. According to German government  officials, in general, approval is a consensus decision.
Non-German companies, as well as German companies in which a  foreigner holds at least 25 percent of the voting rights, are subject to  review if they are seeking to invest in one of the specified sectors and they  are seeking to acquire a 25 percent or greater stake in the German  company. If these criteria are met, the investor should report the  transaction to the Federal Ministry of Economics and Technology. The  investor submits a range of information about both the investor and the  target company, including the following:     proof of the businesses’ legal domicile;    whether the target company has classified information;    a description of the business operations that fall under the War  Weapons List, or cryptographic products;  the companies’ financial statements for the prior 3 years;  the number of shares held, directly or indirectly, in the target company;    a description of stakeholders in the companies who hold more than a  25 percent stake;    a listing of the major suppliers and customers of the target company for  the prior 3 years; and    a breakdown of the companies’ market share in war weapons in the  German market, in the EU market, and when known in the markets of  non-EU countries.
Reporting foreign investment transactions to the German government is  required. An investor’s failure to notify the government may generate a  fine and may be considered a criminal offense. German government  officials noted that it is possible that a foreign investor could invest in  Germany without obtaining ministry approval by not reporting the  transaction. However, according to German government officials,  companies commonly approach the Federal Ministry of Economics and  Technology prior to formal application to gauge whether a given  transaction is likely to be approved.
Under the act, the German government has 1 month to reach a decision  after submission of a complete application to the Federal Ministry of  Economics and Technology. Absent a decision, the transaction is  automatically valid after the 1-month period. According to German  government officials, they have not had problems completing a review  within 1 month. Since the end of July 2004, when the new rules under the  Foreign Trade and Payments Act for reviewing foreign investment came  into effect, a total of 11 acquisitions have been reported for review.
The regulations do not permit government-imposed conditions on  approval. However, according to German government officials, during the  review process the ministry stays in contact with the applicant regarding  any concerns or issues. If such issues are identified, the applicant can  agree to make changes to the business arrangements outlined in its  notification materials to facilitate an approval.
If the Federal Ministry of Economics and Technology were to deny an  application, the decision can be appealed through an administrative  process within the German legal system. To date, there have been no  denials and, consequently, no appeals.
According to German government officials, about 50 companies constitute  the core of the German defense industrial base. If an acquisition were  attempted in relation to these companies, the investor would apply to the  ministry to obtain approval. These officials estimated that roughly 800  companies in Germany could require approval for a foreign merger or  acquisition on national security grounds if the German government were  to extend the review requirement to all defense-related companies. The  law currently does not include dual use items.

	Other Foreign Investment Laws and Policies

In addition to Section 7 of the act, Germany has a number of single-sector  restrictions. For example, ownership control provisions apply in the  private television broadcasting sector. In addition, the German Banking  Act requires an acquisition to be reviewed by regulators if an investor is  interested in purchasing a controlling stake in a bank in Germany. Finally,  a limited number of public monopolies exist in Germany, including inland  waterways, employment services, and the lottery.

Appendix VIII: India

India ranked 25th in terms of the average value of FDI inflows  worldwide between 2000 and 2006.
In 2006, FDI in India totaled $50.7 billion, an increase of $33.2 billion  over FDI stock in India in 2000.
FDI stock in India as a proportion of GDP was 5.7 percent in 2006.
India posted an average growth rate of more than 7 percent in the  decade between 1996 and 2006.

	Background

When India gained independence from British rule in 1947, the country  welcomed foreign investment to establish a technology base as well as  skills in entrepreneurship. In 1973, the Foreign Exchange Regulation Act  (FERA) imposed a ceiling of 40 percent in foreign investment equity in  Indian companies, leading to a flight of foreign investors. In the mid-1980s,  India reversed course and began liberalizing its economy, including  removing various restrictions on foreign investment. Further liberalization  followed the announcement of a new Industrial Policy in July 1991. The  Reserve Bank of India automatically approved foreign investment in  industries designated by the government as priority recipients of  investment. The Foreign Exchange Management Act of 1999 replaced  FERA and removed restrictions on foreign corporations. Further, policies  on licensing were liberalized.
While India has liberalized its foreign investment policy substantially since  1991, according to an Indian government official, the most important  liberalization has occurred in domestic investment brought on by the  privatization of the Indian economy. As the government continues to  privatize state-owned sectors such as ports and energy production, India  would like to attract both domestic and foreign private investment.

	Foreign Investment Laws and Policies

The Foreign Exchange Management Act (FEMA) is one of the primary  laws regulating foreign investment in India. FEMA broadly regulates the  foreign exchange market and provides the Indian government the legal  authority to restrict foreign investment. Because FEMA does not include  implementing regulations, Indian foreign investment policy is primarily  established through a series of public notices or “Press Notes” issued  separately for each sector. Press Notes are usually approved by the  government cabinet and released by the Department of Industrial Policy  and Promotion (DIPP), a department within the Ministry of Commerce and  Industry. DIPP makes all Press Notes publicly available and has published  a comprehensive summary of the individual Press Notes.
The Press Notes establish, among other things, whether investments in  each individual sector must receive government approval or whether  investments fall under the “automatic route,” which does not require  government approval. The Foreign Investment Promotion Board (FIPB) is  an interagency body with the authority to approve investment  transactions. Any proposed investment that requires government approval  must receive approval from the FIPB before the transaction can be  completed. In addition to investments in sectors specifically listed as  requiring approval by the Press Notes, an investment must receive  government approval if (1) the activity requires an industrial license, (2)  the investment is in the financial sector or is subject to the Securities and  Exchange Board, (3) the investor has an existing joint venture in India in  the same field, or (4) the investment falls outside of ownership caps or in  sectors in which foreign investment is prohibited. Investment that receives  FIPB approval is granted the general permission of the Reserve Bank of  India, which administers FEMA, without a separate approval process.
The Press Notes also establish the percentage of a company that can be  owned by a foreign investor in each sector. Foreign ownership caps are  usually set at one of the following levels: zero percent (prohibited), 26  percent (allowing the foreign investor a sufficient share to block major  decisions), 49 percent (maintaining that a majority of shares are held by  Indian nationals), 74 percent (maintaining that Indian nationals hold a  sufficient share to block major decisions), or 100 percent (completely  open). The reasons for the limits on foreign ownership vary from sector to  sector. However, according to an Indian government official, domestic and  economic concerns, such as the effect on Indian businesses, contribute to  the restrictions. In some industries with primarily domestic concerns, such  as retail trade, foreign investment is prohibited. However, it is allowed,  within limits, in the defense industry, which is commonly associated with  national security concerns.
The following are examples of sector-based ownership caps on foreign  investment in India.
Foreign investment is prohibited in:  retail trades (except single-brand retail),    gambling and betting,    housing and real-estate business,    certain types of agriculture.
Limited to 26 percent in (among others):    defense industries,    print media,  insurance.
Limited to 49 percent in (among others):    broadcasting,    domestic airlines,  infrastructure/service sectors.
Limited to 74 percent in (among others):    establishment and operation of satellites,    atomic minerals,    exploration and mining of coal.
Allowed up to 100 percent in other sectors, including:    development of airports,    private oil refineries,    nonatomic electricity generation,  roads and highways.
Ownership caps are independent of government approval requirements.  For example, a sector open to 100 percent foreign ownership may still  require government approval, while a sector capped at 49 percent may be  open through the automatic route. There are no stated monetary  thresholds that trigger a review of foreign investment, except for certain  currency transactions, which must be reviewed by the Reserve Bank of  India at various thresholds.
Foreign investors under the automatic route are only required to notify the  Reserve Bank of India within 30 days of completing the transaction.  According to a government official, the notification information is  primarily for statistical purposes. All foreign investment transactions  require notification, regardless of value or equity percentage, although  according to a government official, there are no measures in place to  ensure compliance with the notification requirement. According to an  Indian government official, potentially harsh penalties for noncompliance  deter investors from avoiding requirements.
Some sectors have additional restrictions and approvals. The Industries  (Development and Regulation) Act of 1951 currently requires industrial  licenses for several sectors, including alcoholic drinks, tobacco, electronic  aerospace and defense equipment, industrial explosives, and hazardous  chemicals. An industrial license was also required for a manufacturing  plant with capital of more than 10 million rupees (roughly $250,000) to  produce any of the 114 items that are reserved for “small scale” producers  (under 10 million rupees) as well as for any industrial project within 25  kilometers of any city with a population of 1 million or more as of the 1991  census. According to the U.S. State Department, the government of India  recently reduced the number of small scale reservations from 114 to 35,  part of an incremental reduction that is expected to continue. Investments  in these sectors must receive an industrial license in addition to approval  from the FIPB.
In addition to the required FIPB review and approval for foreign  investment, investment in the financial sector is subject to approval by the  Reserve Bank of India. Guidelines for FIPB reviews state that for private  sector banks, FIPB approval would be granted only after permission had  been obtained, in principle, from the Reserve Bank. These guidelines are  included in a document entitled Investing in India: a Comprehensive  Manual for Foreign Direct Investment-Policy and Procedures, published  by the Indian government.
Foreign institutional investors such as mutual funds are regulated by the  Securities and Exchange Board of India Act as well as under FEMA. While  foreign nationals are not allowed to invest directly in the Indian stock  market, foreign institutions that are regulated in their home country are  allowed to invest, subject to certain rules, according to the Indian  government. For example, no single foreign institutional investor can  acquire more than 10 percent of an Indian company, and all foreign  institutional investment cannot exceed 24 percent of the capital of the  Indian company. Foreign institutional investors must also receive approval  from the Reserve Bank in some instances, such as non-stock exchange  sales and purchases. According to a law firm familiar with foreign  investment policies in India, the Securities and Exchange Board of India  regulations are much less demanding than those under the FIPB approval  process. In 2006, India amended the Securities and Exchange Board of  India regulations, expanding the list of entities considered foreign  institutional investors, which are allowed to invest in the Indian stock  market, to include governmental agencies such as sovereign wealth funds.

	Review Process

For those transactions that do not qualify for the automatic route, the  FIPB has the authority to reject an investment transaction, and judges  each proposal on a case-by-case basis. FIPB can reject a transaction based  upon “special circumstances” or on factors it considers relevant,  according to FIPB guidelines. While the guidelines emphasize FIPB’s  flexibility, they also offer nonbinding factors that FIPB should consider in  a review. For example, FIPB should consider whether an investment has  any strategic or defense-related considerations. However, the FIPB  guidelines do not specify what would constitute a strategic or defense  related consideration. An Indian government official stated that while an  FIPB review could consider other factors, the primary focus of a review is  to determine whether the proposed investment is compliant with Indian  policy, such as sector equity caps, joint venture approval requirements,  and industrial licensing requirements. According to an Indian government  official, in most cases, FIPB denies approval only if a transaction is not  compliant with Indian foreign investment policy requirements.
The FIPB is composed of the Secretaries of the Department of Economic  Affairs (the Chair), the Department of Industrial Policy and Promotion, the  Department of Commerce, the Division of Economic Relations within the  Ministry of External Affairs; and the Ministry of Overseas Indian Affairs.  According to an Indian government official, the ministry with industry  jurisdiction for each case contributes to the FIPB decisions. Guidelines  suggest that applications submitted to specific ministries should be  brought before the FIPB within 15 days of submission, and that  government approval or rejection should be communicated within 30 days.  However, according to an Indian government official, an investor should  plan on a 3-month review and approval process. Investors may file  grievances or complaints to the Grievances Officer-cum-Joint Secretary  within the DIPP or to the Business Ombudsman within the Ministry of  Commerce and Industry. Once an investor has received approval through  the FIPB, he or she is automatically granted the general permission of the  Reserve Bank without additional review; however, the companies must  notify the Reserve Bank within 30 days of receipt of inward remittances  and within 30 days of the issue of shares to the foreign investors.
According to a lawyer familiar with investment in India, FIPB approval is  usually a legal formality, and FIPB denials are rare. FIPB does not place  conditions upon approval. However, according to a U.S. State Department  official, if the investment application requires modification, an investor is  permitted to resubmit an amended investment application to the FIPB for  approval. Proposals can also be deferred or referred to a different  regulatory body.
Government ministries can exert influence on investment transactions  prior to the transaction entering the formal FIPB process. According to a  U.S. State Department official, the Indian government has intervened in a  number of cases where investors from countries of concern have  attempted to invest in sectors deemed sensitive, such as the  telecommunications sector, often through involvement from the ministry  with industry jurisdiction on an ad hoc basis rather than through the  formal process. Negotiations and informal discussions with the ministries  occur before an investor submits an application to the FIPB, according to  the U.S. State Department. Furthermore, some investment applications to  the FIPB from investors in countries of concern have sat for over a year  without approval or denial, according to a U.S. State Department official.

	New Developments

Indian foreign investment policy in individual sectors changes frequently.  Each year, the Indian Cabinet reviews foreign investment policy and  announces a series of sector-based changes as part of a government-wide  FDI review, according to the U.S. State Department. In January 2008 the  Indian government approved several changes to its FDI policy. The limit  on foreign investment in state-owned petroleum refineries was increased  from 26 to 49 percent. The limits in some parts of the civil aviation sector,  including cargo airlines, were increased from 49 to 74 percent, although  investment in passenger airlines is still limited to 49 percent. Additional  liberalization of foreign investment rules was approved for construction  development projects, commodity exchanges, credit information  companies, industrial parks, and titanium mining. According to the U.S.  State Department, the cabinet-approved policy, which was delayed several  months, dropped the most controversial proposals to expand FDI in retail  and other areas. Changes to individual sectors also can occur outside the  annual foreign investment policy review, according to the U.S. State  Department. For example, in April 2007, the government announced  changes to the conditions of ownership in the telecommunications sector  as a follow-up to changes made in March of 2005 that increased the  telecommunications sector ownership cap from 49 percent to 74 percent.  The 2007 changes introduced additional specific security conditions for  the telecommunications industry, which, according to business  association representatives, are intended to offset potential security  concerns associated with increased foreign ownership in the sector.
According to business representatives that have had experience investing  in India, there have been no recent significant changes that have tightened  controls on foreign investment or increased ownership restrictions. Indian  government officials as well as representatives from a law firm with Indian  investment experience stated that the trend of liberalization will continue  in India. Despite a likely trend of liberalization in the long term, one of the  most controversial areas for liberalization has been in the retail sector,  where foreign investment is seen as a threat to small Indian retail  businesses. According to the U.S. State Department, The Ministry of  Commerce and Industry announced in October 2007 that liberalization in  the retail sector would not occur as part of the ongoing foreign investment  policy review.
The Indian government has also recently considered implementing a  security-based review process. According to the U.S. State Department,  the Indian National Security Council Secretariat suggested creating a  National Security Exception Act (NSEA), which would have established a  process for assessing security threats related to foreign investment, similar  to the U.S. CFIUS process. The idea met resistance from the Ministry of  Commerce and Industry and the Ministry of Finance and was subsequently  abandoned. The debate over the changes represents the institutional  differences between agencies. The National Security Council Secretariat  and the Ministry of Home Affairs would prefer to make security controls  an explicit part of the formal process, while the Ministry of Commerce and  Industry and the Ministry of Finance are concerned about the effect on  investment that further review requirements might have, according to the  U.S State Department. Since the initial proposal was abandoned, U.S. State  Department officials have reported that Indian government agencies are  still debating the need for a national security review of foreign investment.

Appendix IX: Japan

Japan ranked 37th in terms of the average value of FDI inflows  worldwide between 2000 and 2006.
In 2006, FDI in Japan totaled $107.6 billion, an increase of $57.3 billion  over FDI stock in Japan in 2000.
Japan is ranked 21st in the world in terms of FDI stock as of 2006.
FDI stock in Japan as a proportion of GDP was 2.5 percent in 2006.

	Background

Japan possesses the third largest economy in the world. However, foreign  investment is significantly less in Japan than for other large economies. In  2003, the Japanese government set a national goal of doubling the nation’s  stock of foreign investment from its 2001 level by the end of 2006. In  March 2006, the Japanese government set an updated goal that has been  officially adopted by the cabinet to increase foreign investment in Japan to  5 percent of the country’s GDP by 2010.
Trends of foreign investment in the Japanese economy are best  understood within the historical context of the Japanese recovery after  World War II, according to an academic familiar with the Japanese  economy. Whereas countries such as West Germany and France emerged  from the war and took measures to attract foreign capital to rebuild, Japan  has historically had a surplus of capital and therefore little need to attract  foreign investment, according to a consultant on Japanese financial and  trade-related issues. Japan enacted the Foreign Exchange and Foreign  Trade Act (FEFTA) in 1949, which, according to an academic, barred  foreign companies from repatriating profits from Japan, effectively  prohibiting all but a few cases of foreign investment. This continued until  1967, at which time Japan was required to open its economy to foreign  investment to become a member of the OECD. Japan further changed its  laws in 1991, by amending the Foreign Exchange and Foreign Trade Act,  which today remains the primary law relevant to FDI. However, despite  changes in the law, foreign investment did not increase substantially until  the economic downturn in the late 1990s; this increase in foreign  investment is the result of bankrupt companies seeking foreign investors  in order to stay afloat, according to U.S. State Department officials and  representatives from the private sector and academia.
Officials also offered multiple explanations for why foreign investment in  Japan has been low. One explanation is that foreign acquisitions of  Japanese companies face barriers caused by business practices such as  cross-shareholding—the practice of companies holding shares of each  other’s stock—and keiretsu relationships—groups of affiliated companies  that hold each other’s shares and may also have financial (such as bank  loans) or manufacturer-supplier ties or distributor relationships. Cross- shareholding and keiretsu relationships lessen the amount of shares  available on the stock market. In addition, cross-shareholding may prevent  a foreign company from taking management control of a company, even if  the foreign company is the largest individual shareholder. The Japanese  government notes that keiretsu relationships and cross-shareholding have  become less common than they were in the past. Another explanation is  that Japanese businesses are averse to foreign investment. One reason for  that is because Japan possesses a system of guaranteed lifetime  employment, which has led Japanese business managers to place a greater  value on internal corporate loyalty than shareholder returns, according to  the U.S. State Department. Many Japanese companies believe that foreign  investors, especially private equity firms, will harm a Japanese company’s  long-term business interests solely to increase short-term profits,  according to an academic and private sector representatives.
In addition to a business environment generally averse to foreign  investment, companies have increasingly instituted corporate defensive  measures to prevent hostile takeovers by both foreign and domestic  companies as a response to revisions of Japan's Corporate Code that  expanded the types of merger and acquisition transactions allowable in  Japan. Defensive measures such as “poison pills” allow a corporation to  prevent a hostile takeover at the cost of diluting the value of all  shareholders’ holdings. In May 2005, the Japanese government released  guidance on how to appropriately implement defensive measures. As of  May 2007, about 340 companies in Japan had instituted such defensive  measures. In at least one case, the Japanese courts have upheld the right  of a Japanese firm to prevent a foreign acquisition using defensive  measures, according to industry association representatives.
Since the 1990s, acceptance of foreign investment has increased, although  high-profile cases have fueled a fear of foreign investment, according to  U.S. government officials. In the economic recession in the 1990s,  Japanese companies in financial distress needed foreign investors to  prevent bankruptcy, according to an academic. In fact, foreign investment  mergers and acquisitions in Japan have typically occurred only when the  Japanese company is in financial distress, according to a business  association representative. While there have been successful transactions  that have benefited the investor and the Japanese company, some foreign  investment transactions have been viewed as harmful to Japan, according  to an academic familiar with the Japanese economy. One such case  involves a foreign private equity firm’s acquisition of a bank and  subsequent large initial public offering (IPO) for the private equity firm.  This company forced another Japanese company to declare bankruptcy  while producing a large profit for itself, a fact that contributed to the view  that foreign firms do not share Japanese interests.

	Foreign Investment Laws and Policies

Japan’s primary law concerning foreign investment, is the Foreign  Exchange and Foreign Trade Act. The law provides that government  ministries may prohibit or place conditions on a proposed foreign  investment if they determine that it may harm national security, public  order, public safety, or the smooth management of the economy. However,  the Japanese government has not used this authority since FEFTA was  amended in 1991, according to the Japanese government.
The Japanese regulatory scheme established under FEFTA treats foreign  investment differently based upon the sector in which the investment is  taking place, among other criteria. Foreign investment in a sector that is  determined to be sensitive requires prior notification and government  approval, while investment in other sectors only requires an after-the-fact  notification to the government. Foreign investment in all industries  requires notification through one of these routes. A government notice  provides tables that specify the sectors and the individual industries that  require prior and after-the-fact notification. Industries not listed in either  table must submit prior notification. Failure to notify, among other  violations under FEFTA, can result in criminal penalties including jail for  up to 3 years and/or a fine of three times the investment amount or 1  million yen, whichever is larger.
According to the Japanese government, prior notification of a foreign  investment is required for    national security: aircraft, weapons, nuclear power, spacecraft, and    public order: electricity, gas, heat supply, communications,  broadcasting, water, railroads, passenger transport;    public safety: biological chemicals, guard services; and    smooth management of the economy: primary industries relating to  agriculture, forestry and fisheries, oil, leather and leather products  manufacturing, air transport, and maritime transport. (These areas are  reserved under Article 2 of the OECD Code of Liberalization of Capital  Movements.)
Prior notification is also required in additional circumstances. The  Japanese government requires prior notification for investments from  countries with which Japan has not completed a reciprocal investment  agreement  and if the foreign investment involves certain capital  transactions subject to permission by the Finance Minister. If there is  doubt as to whether a company is subject to prior notification,  administrative agencies will provide an advance consultation outside of  the formal review process.
On September 28, 2007, a Japanese Cabinet Ordinance came into effect,  requiring that industries for dual use items and items used for the  maintenance of the defense industrial base provide prior notification for  foreign investment. These changes were based on recommendations of a  study group convened by the Ministry for Economy, Trade, and Industry  (METI), according to the Japanese government. The change was intended  to prevent the outflow of technology, especially that which has a high  probability of conversion to use in weapons of mass destruction, and  maintain the domestic defense industrial base. The revisions include a list  of all specific industries and items that fall under the new prior  notification requirements, including industries involved in making  accessories or components related to the manufacture of arms, aircraft,  satellites, and nuclear reactors. Additionally, manufacturers making  testing equipment, repair equipment, and certain types of software usable  in weapons and airplanes will fall under prior notification requirements.
According to the Japanese government, the review of foreign investment  regulations was initiated because of the changed security environment  surrounding Japan and trends in international investment activity. This  was the first review of foreign investment regulations in 16 years, since  FEFTA was amended in 1991. While there was no single triggering event  for these changes, there were several controversial investments, both  domestic and foreign, that have raised public concern with mergers and  acquisitions over time, according to U.S. State Department and industry  association representatives.
A foreign investor in sectors that require after the fact reporting must file a  report with the Ministry of Finance and the ministry with jurisdiction over  the industry through the Bank of Japan within 15 days after a transaction  occurs. In previous interviews with Japanese government officials, GAO  was told that this reporting was for statistical purposes and in case of an  emergency, such as a financial crisis or war.
FEFTA broadly defines “foreign investment” as the (1) acquisition of at  least 10 percent foreign ownership of shares in a company listed on a  Japanese stock exchange; (2) acquisition of any shares in an unlisted  company; (3) establishment of a branch, factory, or other business office  in Japan; (4) consent given to change the corporate objectives of a  domestic company with one-third or more foreign ownership; or (5) loan  of certain types and amounts of money to domestic companies.
In addition to adding industries subject to prior notification and review,  the September 2007 Cabinet Ordinance made several other changes. It  expanded the scope of FEFTA to include investment in a parent company  when a subsidiary falls under a sector that is subject to review and  provided clarification on the percentages of foreign ownership that fall  under the regulations. If more than 50 percent of a company is controlled  by foreigners, but no single foreign investor owns more than a 10 percent  share, that investment will not fall under FEFTA regulations. However, if  10 percent of the company is owned among separate investors that have  agreed to collectively exercise their voting rights, the investment will be  subject to FEFTA regulations. Also, the ministries can request detailed  information from the foreign investors and the target company; under  previous regulations, such information was available only if the investor  supplied it voluntarily.
In addition to the review process implemented under FEFTA, there are  specific restrictions to other sectors. According to OECD, foreigners or  foreign-controlled enterprises are not granted licenses in the broadcasting  sector (except cable television and broadcast on telecommunications  services) under the Radio Law and Broadcast Law, which were both  passed in 1950. Similarly, the 1984 Law Concerning Nippon Telegraph and  Telephone Corporation requires that board members and auditors of the  Nippon Telegraph and Telephone Corporation have Japanese nationality.  Also, the Japanese government is obligated to hold stocks in Japan  Tobacco Inc.

	Review Process

FEFTA authorizes the Ministry of Finance and the ministry with industry  area jurisdiction to review investments that are required to provide prior  notification. The notification form requires information on the percentage  of shares to be acquired, the business plan of the investing company, and  the reason for the transaction. However, the ministries may also consider  information related to foreign control, such as the number of foreign  board members and the foreign company’s reputation, according to  Japanese government officials. The ministries review investments on a  case-by-case basis. While threats to national security, public order, public  safety, or the economy are factors considered in a review, specific criteria  used to determine when an investment poses a significant threat are not  published.
The ministries have 30 days to review a proposed investment after a  foreign company has notified the ministries of its intent to invest. If the  investor has not received a response within that time, the transaction is  automatically approved, according to METI officials. The ministries may  extend the review period up to 4 months if they believe further inquiry is  necessary. A Committee on Foreign Exchange and Other Transactions also  may extend the review period an additional month. However, the Japanese  government noted that reviews can be, and frequently are, shortened to 14  days. Japanese law provides for a public hearing if an investor wishes to  contest the result of the ministerial review. After the public hearing, an  investor may submit an administrative appeal to overturn the decision and  if the appeal is rejected, an investor can then request the court to overturn  the decision.

Appendix X: The Netherlands

The Netherlands ranked eighth in terms of the average value of FDI  inflows worldwide between 2000 and 2006.
In 2006, FDI in the Netherlands totaled $451.5 billion, an increase of 85  percent over FDI stock in 2000.
FDI stock in the Netherlands as a proportion of GDP was 68.2 percent  in 2006.

	Background

The Netherlands’ trade and investment policies are among the most liberal  in the world. As a founding member of the EU and the home of the  International Court of Justice, the Netherlands has historically emphasized  the development of international institutions and maintains an economy  with a strong international focus. The Netherlands Constitution is one of  only two constitutions in the world to include a provision requiring the  government to further international institutions and the rule of law.  According to lawyers familiar with foreign investment policies in the  Netherlands, there were a series of significant changes in Dutch corporate  law in the 1980s that favored corporate shareholders. The changes were  largely reactions to the broad social policies of the 1960s and 1970s. These  revisions to the law, combined with the fact that the Netherlands has a  highly educated population, have made the country a prime target of  investment over the past several decades. Foreign companies established  in the Netherlands account for roughly one-third of industrial production  and employment.

	Foreign Investment Laws and Policies

The Netherlands possesses no review process for foreign investment, and  according to Dutch government officials, the Netherlands lacks the general  authority to block investment. Foreign and domestic companies are  treated equally under Dutch law, and regulations for mergers and  acquisitions apply to domestic as well as foreign investment, according to  Dutch government officials. Foreign investment, like domestic  investment, must go through an anti-trust review. However, these reviews  do not provide the Dutch government the authority to block investment  upon national security grounds, according to government officials. The  one exception is in the financial sector, in which the Netherlands Central  Bank, and in some cases the Finance Minister, can block mergers and  acquisitions.
The Financial Supervision Act establishes the authority for the  Netherlands Central Bank to review and grant approval to all mergers and  acquisitions involving Dutch companies in the financial sector, including  banks, management companies for collective investments, investment  firms, and insurance companies. For a transaction involving one of the five  largest banks in the Netherlands, the transaction must receive approval  from the Ministry of Finance. When a company acquires at least 10 percent  ownership of a Dutch company, the investor must apply to the  Netherlands Central Bank to receive a “declaration of no objection.”  According to Dutch government officials, this application can be  submitted after a transaction has been completed. The Netherlands  Central Bank performs a review of the transaction and decides whether or  not to issue a declaration of no objection. In the case of the five largest  banks, the Netherlands Central Bank makes a recommendation to the  Finance Minister, who has the authority to issue the declaration of no  objection. The Netherlands Central Bank or the Finance Minister can  effectively block a transaction by refusing to issue this declaration. The  Bank or Finance Minister has 3 months from the date of application to  render a decision.
The review and approval process in the financial sector is primarily  intended to determine whether any financial mergers or takeovers would  lead to undesirable developments in the Dutch financial sector. According  to Dutch government officials, the process is not generally treated as a  review or approval process at all; rather, it is a contractual agreement  whereby acceptable conditions of the merger are established. However,  the Financial Supervision Act states that the government of the  Netherlands has the authority to provide “prudential supervision” of  mergers, and according to a Dutch law firm with experience facilitating  investment in the Netherlands, this review provides a general discretionary  authority to deny transactions so long as a decision is supported on  reasonable grounds. According to the law firm, if there is a threat to  national security, the Netherlands Central Bank or the Finance Minister  could block a transaction using this authority. According to Dutch  government officials, a situation in which foreign transactions could be  blocked would be if there was spillover from U.S. sanctions. For example,  investment from businesses in countries such as Venezuela and Iran may  be determined to harm the functioning of the Dutch market and could thus  be blocked.

		Restricted Sectors

Certain sectors are publicly owned and controlled, and are therefore  closed to foreign investment. According to a Dutch government official,  public monopolies exist in the following instances:    A state-owned enterprise owns and administers the national high- voltage electricity grid. However, electricity production and  distribution are open to foreign investment.
Water grids are locally held monopolies. While some water grids have  been privatized to foreign entities, new legislation passed in 2004  prevents further privatization. According to Dutch government  officials, water is maintained by the government primarily due to health  concerns.
Railway passenger services are controlled by a state-owned enterprise  and are effectively closed to investment.
The national airport is currently closed to investment. While  privatization has been discussed for years, the current government has  decided not to privatize the airport.
The Netherlands Central Bank is a monopoly and is closed to  investment.
Postal service below 50 grams per letter is closed to investment. This  monopoly is still in place, but is slated to be abolished by December 31,  2010, as part of a decision to abolish this monopoly in most of the  European Union nations.
Public bus transport is generally open to foreign investment, although  within some cities, the bus lines are owned by the local government.
Dutch government officials generally cited maintaining a competitive  market as a reason why these sectors are closed to investment. Dutch  government officials noted that privatizing sectors where there is a  monopoly would present a threat to open competition in the market.
However, Dutch government officials also cited other reasons for the  government maintaining control of sectors, such as the fact that the water  grids could present a health issue if not properly maintained. All of the  listed restrictions fall under the transportation, water supply, energy, or  banking sectors, which are considered part of “critical infrastructure” by  U.S. government sources. According to a U.S. State Department official,  one reason these sectors are protected in the Netherlands is that they are  perceived by the Dutch to be vital to their security interests.
The Netherlands has imposed nationality requirements in the air transport  industry. European Union law requires that an airline registered and  licensed in the Netherlands must be majority owned and controlled by EU  nationals. In 2004, an airline from another EU member state acquired the  Dutch national airline and maintains a majority share in the combined  company. Despite the fact that the partner investor is another European  airline, the Netherlands recently renewed the right to dilute shares to  acquire 50.1 percent of voting rights in the case that another nation  terminates or restricts an international route because the airline is not  effectively controlled by Dutch nationals.

	New Developments

The Netherlands currently has no plans to change its laws for managing  foreign investment, according to U.S. State Department officials. However,  some members of the Dutch government have argued that changes should  be made. High-profile transactions have raised concerns with foreign  investment among certain factions in the Netherlands. According to U.S.  State Department officials, the debate about whether the Netherlands  should institute stricter controls on foreign investment was first raised  with the acquisition of the Dutch national airline in 2004. Some people  believed that certain traditionally Dutch companies should stay in control  of Dutch nationals, according to U.S. State Department officials.
The negotiations involving the acquisition of a Dutch bank by foreign  investors has reopened the debate concerning the protection of Dutch  companies from foreign acquisitions. The terms of the acquisition of the  bank by foreign investors were approved by the Ministry of Finance and  were recently finalized. However, some members of Parliament have  expressed concern about the transaction and announced a desire to  debate both the specific transaction as well as potential changes to the  entire regulatory scheme for granting approvals. While the Parliament has  not intervened in the regulatory process, the Finance Committee within  the Dutch Parliament planned to debate the bank transaction on October  17, 2007, and again on November 8, 2007. According to U.S. State  Department officials, one change suggested by Dutch government officials  has been to increase the role of the financial supervisor, effectively  delegating a body within the government to oversee mergers and  acquisitions. Another suggestion has been to reintroduce golden shares in  certain domestic companies. Golden shares would grant the government  veto rights over substantial changes to particular companies that have  been determined to serve the public interest. The Netherlands divested its  golden share in the national postal firm in 2006 after the European Court  of Justice ruled that the golden share unduly restricted the free movement  of capital.
The bank transaction also raised concerns about state-owned enterprises  and sovereign wealth funds. A failed bidder for the Dutch bank was  partially owned by a state-owned bank from China and a sovereign wealth  fund from Singapore. Had the transaction been completed, a minority  share of the Dutch bank would be indirectly owned by the Chinese and  Singaporean governments. This fact, according to a Dutch law firm  familiar with the transaction, concerned members of the Dutch Parliament  and was one reason for calls for debate over the bank transaction.  However, the Netherlands has typically not been opposed to investment  from government-controlled investors, and according to Dutch  government officials, there are already state-owned enterprises that have  invested in companies in the Netherlands.

Appendix XI: Russia

Russia ranked 18th in terms of the average value of FDI inflows  worldwide between 2000 and 2006.
In 2006, FDI in Russia totaled $197.7 billion, an increase of more than  $165.5 billion over FDI stock in 2000.
FDI stock in Russia as a proportion of GDP was 20.2 percent in 2006.

	Background

In 1991, Russia began its transition from a centralized command economy  to a market-based economy and thus has less than two decades of  experience with foreign investment. Roughly three-quarters of the Russian  economy has been privatized, although the state continues to hold blocks  of shares in many privatized enterprises. According to U.S. business  representatives and lawyers in Russia, business ventures have become  more complex since the earliest days of the opening of the country to  foreign investment. According to the U.S. State Department, while the  Russian economy has begun to diversify and institute economic reforms,  the government budget and economy continue to be dependent on oil and  gas revenues. About 40 percent of investment in Russia is in the energy  sector. Other sectors receiving foreign investment are transportation, real  estate, services, machinery, banking, and retail. The Russian government  recognizes the need to promote new investment in aging infrastructure  and believes it can do this through controlling strategic enterprises, state- sponsored investment funds, special economic zones, and limiting foreign  investment in key strategic sectors.

	Foreign Investment Laws and Policies

Under the 1999 Federal Law on Foreign Investments, the Russian  government may block foreign investment to ensure the defense of the  country and the security of the state. However, according to Russian  government officials, no regulation or process was put in place to  implement that section of the law. Two transactions with national security  implications were attempted in 2004 and 2005. The Russian government  reviewed the transactions using an ad hoc process in which the Federal  Anti-Monopoly Service (FAS) received the investors’ applications for an  anti-monopoly review and then coordinated a review through the Russian  government’s security ministries. One transaction was eventually  approved and one was not. As a result of these attempted investments, the  Russian President’s 2005 State of the Russian Federation speech called for  legislation to formalize a process to protect Russia’s interests by reviewing  foreign investment in sensitive economic sectors, according to Russian  government officials.
In response, according to Russian government officials, the Ministry of  Economic Development and Trade and the Ministry of Industry and  Energy, in conjunction with the Russian presidential administration and  the Russian security services, developed the proposed Strategic Sectors  Law-–which, according to a senior Russian government official, resembles  certain aspects of the U.S. CFIUS process. Several versions of the  legislation have been drafted; one version went to the Russian Duma for  approval in July of 2007. According to the U.S. State Department, a more  restrictive version of the Strategic Sectors Law and relevant amendments  to the Subsoil Law were announced by the Russian government on  February 21, 2008. As of February 26, 2008, the Strategic Sectors Law had  not been passed, and is subject to change. The new draft of the Strategic  Sectors Law and the Subsoil Law amendments could be considered by the  Duma in the spring of 2008.
The Russian legal system is based on civil, not common, law. As a result,  according to a senior Russian government official, Russian laws are more  detailed than might be the case under a common law system. This official  noted that this characteristic of civil law systems partially explains the  degree of detail that is found in the proposed Strategic Sectors Law. In  addition, Russia’s basis in civil law also helps illuminate why the lack of  implementation procedures in the 1999 Federal Law on Foreign  Investments in Russia was particularly problematic.

	Review Process

According to Russian government officials, under the current system, the  Federal Anti-Monopoly Service is the only government entity with explicit  authority to approve foreign investment transactions. The current process  requires investors to submit applications for anti-monopoly review to the  FAS. The FAS determines whether the investment may cause a national  security concern, in addition to its primary role of determining anti- monopoly considerations. The FAS solicits input from other members of  the Russian federal government on whether the proposed transaction  should be approved or blocked, and delivers the decision to the investor.  According to Russian government officials, this ad hoc process was  developed out of necessity, it is not a process intentionally crafted to most  effectively protect Russian national interests, and it is a painful process for  foreign investors because of the lack of transparency.

		Thresholds for Mandatory Review

Under the 1999 Federal Law on Foreign Investments, application for FAS  review of foreign investment is mandatory when a proposed transaction  meets certain thresholds. For example, if the aggregate value of the assets  of the merged or acquired entities exceeds 3 billion rubles, if the aggregate  revenues of the entities will exceed 6 billion rubles, if the entities control  more than 35 percent of the market, or if the investor seeks to obtain more  than one-third of the shares in a company, then prior approval of the  investment by the FAS is required. According to U.S. industry officials in  Russia, in cases where the thresholds are not met, the investor may need  to notify the FAS of the transaction, but not necessarily obtain prior  approval.

		Standard Review Time Frames

Under the current FAS anti-monopoly review, the standard time frame for  review, upon receipt of the complete investor application, is up to 30 days.  These 30 days are for conducting the FAS review, and do not incorporate a  standard time frame for conducting national security reviews. Because  national security reviews under the current process are ad hoc, they have  no set time frames. For example, according to an industry official, in one  case, which did ultimately receive approval, it took over 7 months for a  final decision to be reached. During this period, the investor provided the  Russian government with supplemental materials to the FAS review  packet, in addition to holding meetings with Russian government entities.

		Use of Mitigation Agreements

While the current FAS anti-monopoly review process is not technically  designed to mitigate potential concerns that arise during the ad hoc  national security review of foreign investment, in practice the signing of  mitigation agreements has occurred between the Russian government and  the applicant investor to enable the approval of a transaction.

		Judicial Appeal of Review Decisions

According to lawyers experienced in foreign investment in Russia, a denial  issued by the FAS under the current anti-monopoly review process can  technically be appealed through the Russian judicial system. However,  these lawyers do not believe that an appeal attempt is likely to be  successful, unless the investor presents information that was not included  in the original application.

	New Developments

The Russian government’s Ministry of Economic Development and Trade  and the Ministry of Industry and Energy, in conjunction with the  presidential administration and the security services, developed a new  Strategic Sectors Law. The new draft of the law could be considered by  the Duma in the spring of 2008, according to the U.S. State Department. If  passed, the law will create an interagency review process for foreign  investment. The July 2007 version of the proposed Strategic Sectors Law  specified 39 sectors that are considered sensitive. Among other changes,  the February 2008 version of the draft combined some sectors and added  four strategic sectors to the list.
Under the proposed law, investors would still apply to the FAS for an anti- monopoly review, but would also be subject to a separate review if the  proposed investment falls within a covered sector. According to the July  2007 draft of the Strategic Sectors Law, the review will occur within an  interagency body representing a range of Russian government economic  and security ministries, potentially headed by the Prime Minister’s office.  The interagency body may include  the Federal Anti-Monopoly Service,  the Ministry of Economic Development and Trade,  the Ministry of Industry and Energy,  the Ministry of Defense, and  the Federal Security Service.
However, according to Russian government officials, the Russian  government has not decided which government entity will receive  applications for review. Further, according to the U.S. State Department,  as of February 2008, the government had not reached agreement on which  agency will lead the interagency group in reviewing investments, which  has vital implications for the potential implementation of the proposed  law. It is clear, however, that the February 2008 version of the draft  reflects additional input from Russian security ministries, including the  Federal Security Service.
Under the most recent version of the proposed Strategic Sectors Law,  foreign companies seeking to obtain greater than 50 percent or a  controlling stake, as defined by the law, in a Russian company will need to  obtain Russian government approval if the target company is in a listed  sector. These are    pathogens;    nuclear devices and radiation sources;   coding/cryptographic equipment;   explosives, weapons, and military machinery;   aviation security and machinery (except civil aviation);   any activities related to space;    natural monopolies (e.g., oil and gas extraction); and    metals and alloys having special properties.
The February 21, 2008, version of the Strategic Sectors Law adds four  sectors to those that were included in the July 2007 draft. The additional  sectors are  telecommunications,   radio,   television, and   fishing.
In addition, the February version of the Strategic Sectors Law further  limits unsupervised foreign acquisition of Russian companies that own  licenses to develop “strategic subsoil assets” to 10 percent, according to  the U.S. State Department. Further, entities partly owned by foreign  governments would be subject to a 5 percent limit on unsupervised  ownership, according to the most recent draft. Foreign entities seeking a  greater share of relevant Russian companies would need Russian  government approval from a special commission.
The government approval includes both the mandatory anti-monopoly  review and the national security review of the proposed investment. If a  foreign investor does not seek a controlling stake, then only the standard  FAS review is required. According to Russian government officials, the  determination of what sector a proposed transaction falls within will be  based on the acquired company’s government-issued business license.  According to Russian government officials and lawyers experienced with  foreign investment in Russia, the proposed Strategic Sectors Law, like the  current FAS review process, identifies the specific documents and  materials that must be submitted for the review to be completed. Under  the current FAS review process, the FAS can ask for supplemental  documentation from the investor if it deems it necessary, which may delay  the application process somewhat. However, according to the lawyers, this  additional documentation is not normally difficult to provide or time- consuming.
According to Russian government officials, the proposed Strategic Sectors  Law identifies specific criteria against which the proposed transaction will  be judged by the interagency review body that is designated to determine  whether a national security consideration merits denying an application.  Decision criteria include, for example, whether the company to be  invested in    possesses state secrets,    produces products subject to export controls,    produces military goods, or    deals with natural monopolies (e.g., oil, gas).
Under the proposed Strategic Sectors Law, the standard time frame for  governmental review of foreign investment will be up to 90 days. In the  event that the government determines that it needs additional time to  complete its review, the initial 90-day review period can be extended by an  additional 90 days, for a total of 180 days, or 6 months. According to the  U.S. State Department, the Russian government has not decided whether  the anti-monopoly review and the national security review will occur  concurrently or consecutively. If held concurrently, the total review time  frame would be 90 days, or 180 days in exceptional cases. If held  consecutively, the total review time frame would expand to 120 days, or  210 days in exceptional cases.
If a proposed transaction meets the criteria for possible denial, but the  threat to Russian national interests can be mitigated, then, according to a  Russian government official, the deal will be approved if the investor  accepts certain required conditions. The proposed Strategic Sectors Law  provides for a range of possible mitigation conditions that may be enacted.  These may include  a commitment to protect state secrets, including potential access  limitations for the investor;  a commitment to continue deliveries of products, performance of  work, and rendering of services under existing military contracts;  a commitment to maintain the acquired firm’s mobilization capacity;  a commitment to work in accordance with tariffs subject to Russian  Federation legislation on natural monopolies;  a commitment to the fulfillment of business plans for further  development;  a commitment to measures to be taken aimed at preventing a threat to  national security if martial law or a state of emergency is imposed; or  a commitment to avoid staff layoffs for a designated period.
For example, according to a Russian government official, the Russian law  on state secrets governs and limits who can lead an organizational unit of  a company that possesses Russian state secrets. If a Russian company  were purchased by a foreign entity, based on signed mitigation conditions,  the unit within the company holding state secrets may be required to be  run by Russian nationals with security clearances. According to a Russian  government official, it has not yet been decided which Russian  governmental entity will be responsible for ensuring that signed mitigation  conditions are adhered to by the foreign investor.
The proposed Strategic Sectors Law provides for a judicial appeals  process if the Russian government fails to issue a decision within 90 days  or within the designated extended time frame.
The current 1999 Federal Law on Foreign Investment does not  differentiate between foreign state-owned enterprises and others that seek  to invest in Russia. According to Russian government officials, under the  proposed Strategic Sectors Law, special rules will apply to foreign state- owned enterprises. Such entities will be barred from acquiring a  controlling stake in Russian companies that are subject to the proposed  Strategic Sectors Law, and in addition, foreign state-owned enterprises  will have to seek Russian government approval to acquire a noncontrolling  25 to 49 percent stake in a Russian company.
While reviews of foreign investment fall under the provisions of the 1999  Federal Law on Foreign Investment as applied through the FAS anti- monopoly review process, the extraction of subsoil resources, for  example, oil and natural gas, is subject to a range of requirements under  the Russian Federation Law on Subsoil. The current standard has allowed  foreign investment in certain projects above the 50 percent threshold. The  Russian government is currently in the process of drafting amendments to  the Subsoil Law that would implement a number of changes. The July  2007 draft of the amendments allowed foreign investment in strategic  subsoil resources up to 50 percent of the total stake in the given reserve.  In addition, according to a Russian government official, under the  proposed amendments, the required licenses for operations will only be  given to domestic extractors. Foreign investors will have to enter into joint  ventures with Russian oil and gas companies to invest in these areas.
Another important proposed change to the Subsoil Law would be the  designation of certain reserves of subsoil resources (e.g., oil, natural gas,  gold, and copper), that are larger than specified thresholds, to be “of  federal significance” to the Russian Federation. The amendments would  define "strategic field" as any oil field with extractable reserves of more  than 70 million tons, gas fields with more than 50 billion cubic meters, and  all offshore fields.  Companies in which the Russian government is a  majority owner would be exempt from limitations of foreign ownership.

	Other Foreign Investment Laws and Policies

In addition to the 1999 Federal Law on Foreign Investment, other laws and  policies in Russia affect foreign investment. For example, based on a  Presidential Decree, certain Russian state-owned enterprises (SOE) and  companies are not open to foreign investment. This listing of over 1,000  SOEs and companies that are off limits to foreign investment includes  scientific, defense, and military factories and institutes; media companies;  ports; airports; and shipping companies. According to a Russian  government official, the Presidential Decree list and the companies in the  sectors identified in the proposed Strategic Sectors Law may overlap.
In addition to the listing of specific SOEs and companies that are off limits  to foreign investment, certain individual sectors within the Russian  economy also have investment limitations. For example, according to a  Russian government official, foreign investment in the aviation sector in  Russia cannot currently exceed 50 percent control of the target company,  and foreign investors must seek approval for obtaining a 25 to 50 percent  stake.

Appendix XII: United Arab Emirates

The United Arab Emirates (UAE) ranked 32nd in terms of the average  value of FDI inflows worldwide between 2000 and 2006.
The UAE was the 50th largest recipient of FDI in the world in 2006.
In 2006, FDI in the UAE totaled $37.1 billion, an increase of more than  $36 billion over FDI stock in the UAE in 2000.
FDI stock in the UAE as a proportion of GDP was 22 percent in 2006.

	Background

The UAE is a loose federation of seven emirates, each with its own ruler.  The UAE constitution established a government that includes a President,  Vice President, Council of Ministers, Federal Supreme Council, and a 40- member Federal National Council. The Federal Supreme Council is the  highest constitutional authority and is composed of the seven emirate  rulers.
According to U.S. State Department officials, the UAE has one of the most  open economies in the Middle East. In 2005, foreign investment in the UAE  was approximately $10 billion, accounting for nearly 34 percent of total  foreign capital in the Arab world that year. Oil and natural gas production  generated approximately 36 percent of the country’s GDP in 2005. In  addition, the UAE controls almost 10 percent of the world’s oil reserves.  However, only 15 to 20 percent of the UAE’s 4.4 million residents are UAE  citizens. According to a UAE official, over 90 percent of private sector  output comes from non-UAE residents. example, foreign investment and joint ventures in the UAE’s oil and  natural gas industries are based on decades-long relationships between the  government of the UAE and western business partners.

	Laws and Policies

According to U.S. and UAE officials, the Companies Law and the Agencies  Law represent the largest legal barriers to foreign direct investment in the  UAE. The Companies Law states that foreigners and foreign companies  are prohibited from owning more than 49 percent of a company  established in the UAE. The Agencies Law states that foreign importers  must operate through an agent to bring goods into the UAE. This agent  must be either a UAE national or a company that is wholly owned by a  UAE national.
According to U.S. and UAE officials, the Companies Law and the Agencies  Law were implemented to ensure the country’s economic growth would  benefit its small citizen population by drawing UAE citizens into the  workforce. However, according to a UAE official, since most private  sector output comes from non-UAE citizens, these laws were particularly  intended to draw UAE citizens from the government workforce into the  private sector. Together, these efforts are sometimes referred to as the  Emiratisation policy. According to a UAE official, these efforts reflect a  constant tension between maintaining openness to the world and avoiding  the social and political strife that can accompany efforts to modernize.

	Related Restrictions to Foreign Investment

The Government Tenders Law and the Federal Industry Law also restrict  foreign investment in the UAE. The Government Tenders Law states  government suppliers and contractors must be UAE citizens or companies  at least 51 percent owned by UAE citizens. In addition, according to an  official from the Office of the U.S. Trade Representative, each emirate has  its own rules on government procurement. The Federal Industry Law  states that industrial projects must be 51 percent owned by UAE citizens,  and that projects must be managed by a UAE citizen or have a board of  directors that has a majority of UAE citizens.
In addition to the above restrictions, the UAE limits foreign ownership of  land, with rules varying from emirate to emirate. The UAE also has sector-  by-sector limits on foreign ownership. Some sectors, like insurance,  telecommunications, and travel agencies, are still mostly closed to  foreigners. Traditionally, foreign investment in the UAE’s oil and natural  gas sectors has been limited to 40 percent, divided among several foreign  joint venture partners. Emirate-level governments retain control of the  other 60 percent, according to U.S. and oil industry officials.

	Exceptions Exist to the UAE’s Foreign Investment Restrictions

According to U.S. officials, the UAE has exceptions to the Agencies Law  and the Companies Law, including 32 free trade zones (FTZ), which are  special administrative areas governed by individual emirates, and country-  specific exemptions. According to UAE officials, FTZs are not subject to  any federal laws except criminal. Consequently, FTZs are exempt from the  Companies, Agencies, Government Tenders, and Industry Laws. According  to U.S. officials, FTZs usually have lower labor and tax requirements, and  allow foreign companies to own 100 percent of an enterprise in any FTZ.  This makes them attractive locations for foreigners to invest. However,  according to U.S. officials, a foreign company invested in an FTZ that  attempts to invest in non-FTZ areas would be subject to the UAE’s foreign  investment laws and regulations. According to one of these officials, this  has created two separate and distinct economies in the UAE-–the FTZ  economy and the regular UAE economy.
According to U.S. officials, many of the barriers associated with foreign  direct investment do not apply to citizens of other Gulf Cooperation  Council countries, including Saudi Arabia, Qatar, Bahrain, Oman, and  Kuwait. U.S. officials said the result is that the UAE has three levels of  access for investors, whereby UAE nationals receive the most investment  access, Gulf Cooperation Council nationals receive slightly less access,  and non-Gulf Cooperation Council nationals receive the least access to  investment opportunities in the UAE.

	Practices

to invest in an area deemed to be unacceptable, the investor will be  privately redirected.
According to U.S. and UAE officials, this practice is informal for several  reasons. First, the UAE’s reputation for having an open business  environment is very important to its economic success. Consequently, the  UAE government is hesitant to say publicly that a given sector is closed.  Second, since business deals in the UAE are based on personal  relationships, the UAE government generally believes it is better to handle  rejections quietly. Third, the UAE and individual emirates try to direct  foreign investment into sectors where they see a development need.  Fourth, since the UAE has only existed as a nation since 1971, its informal  practices are not yet institutionalized.
The UAE has several national security concerns that, while not publicly  stated, the government may consider when assessing foreign investment.  For example, according to U.S. officials, the UAE treats oil and natural gas  production as a national security issue since these industries represent a  major portion of the country’s GDP. U.S. officials told us that, as a  consequence, the UAE government strictly controls investment in those  areas, although restrictions are not made public. The UAE’s labor market  is another unstated national security concern, since the vast majority of  private sector workers are foreigners. Water and power generation are  considered strategic as well.

	New Developments

According to U.S. and UAE officials, the UAE is in the process of relaxing  its investment laws. However, according to U.S. officials, this is difficult  due to opposition from Emeriti citizens who benefit from the current laws.  According to U.S. and UAE officials, current laws limiting foreign  investment in the UAE are incongruent with the UAE’s efforts to attract  foreign investment. However, according to the U.S. State Department, the  UAE’s current laws have created interest groups in the UAE that depend  on the benefits these rules provide. U.S. officials told us that opening  investment outside the FTZs involves overcoming entrenched opposition  from local constituencies, particularly those with agency agreements,  making further liberalization of investment policies a slow process.
Economy to dissolve such contracts. However, according to a U.S. official,  while foreign companies technically have legal recourse, in reality the  process of dissolving a contract with a nonperforming agent is still  extremely difficult.
According to a UAE official, the central government intends eventually to  dissolve the Companies Law and the Agencies Law. However, this  probably will happen in stages. According to the same official, the current  49 percent cap on foreign ownership in the Companies Law likely will be  raised to 75 percent, and then 100 percent. Moreover, this liberalization  probably will happen on a sector-by-sector basis.

Appendix XIII: United Kingdom

The United Kingdom (UK) ranked second in terms of the average value  of FDI inflows worldwide between 2000 and 2006.
In 2006, FDI stock in the UK totaled $1,135 billion, an increase of $696.6  billion over FDI stock in 2000.
FDI stock in the UK as a proportion of GDP was 47.8 percent in 2006.

	Background

The UK has historically maintained a liberal investment policy with an  economy based on trade and is the second largest single recipient of  inbound foreign investment in the world. The UK generally makes no  policy distinction between domestic and foreign investment. The primary  exception is for investments affecting national security. More than 25  percent of businesses located in London are currently under foreign  ownership.

	Foreign Investment Laws and Policies

against the national interest. However, the British government has never  used the authority provided under this act. The Enterprise Act of 2002  provides the government the authority to intervene to block or place  conditions on the approval of mergers and acquisitions involving British  companies if the transaction is considered to be against the public interest.  The authority under the act has been designated to the Secretary of State  for the Department of Business, Enterprise, and Regulatory Reform  (DBERR–- previously the Department of Trade and Industry). The  Enterprise Act overhauled the framework for regulating mergers in the  UK, updating the Fair Trading Act of 1973.
According to British government officials, the Enterprise Act is primarily  intended as a review of competition or anti-trust concerns associated with  mergers. However, the law allows for a “special intervention” when the  Secretary of State determines that a transaction may harm the public  interest. This allows the government to intervene if a foreign investment  poses a threat to public security. The act, as amended, specifies that  foreign investment involving national security, the media, or water is  subject to a public interest intervention by the Secretary of State. The  Enterprise Act provides specified considerations that are relevant to the  United Kingdom’s national security. However, the Secretary of State has  broad authority to intervene due to considerations that, while not  specified by the law, “in the opinion of the Secretary of State, ought to be  so specified.” Similarly, the Secretary of State has the authority to issue an  order that effectively modifies the relevant section of the Enterprise Act so  that considerations that have not been specified are effectively added to  the law. The Enterprise Act also specifies that the Secretary of State has  the authority to intervene in mergers involving a UK government  contractor that possesses information “relating to defense and of a  confidential nature.”
Transactions in which (1) sales exceed £17 million annually or (2) the  relevant market share exceeds 25 percent may require a review by the  British Office of Fair Trading. Additionally, the UK may intervene in a  foreign investment of any size in the areas of national security or the  media if the government deems it is in the public interest to do so and the  Secretary of State issues a special intervention.
Since the Enterprise Act merger provisions came into effect in 2003, the  Secretary of State has issued an intervention notice six times on national  security grounds; only one of these notices was issued when there was not  also an accompanying anti-monopoly review. All six of these cases involve  the protection of sensitive information associated with military programs.  The Secretary of State approved each proposed transaction under the  condition that the acquiring company accepts a series of undertakings to  mitigate the security risk associated with the investment. According to  business representatives familiar with the intervention and review  process, one of the companies eventually did not complete the proposed  approved deal. A seventh public interest intervention was initiated  because of a merger in the media field. The Secretary of State issued an  intervention notice for the acquisition of a minority share in a television  broadcasting company in February 2007. The case was reviewed by the  Competition Commission, one of the reviewing bodies under the  Enterprise Act. The Competition Commission made recommendations to  the Secretary of State, and in January 2008, the Secretary made an adverse  public interest finding in the case and will require a partial divestment of  shares.

	Related Restrictions to Foreign Investment

The British government restricts foreign investment in specific companies  that it considers important to the national security of the UK. Through  government ownership of a golden share established in the articles of  association of each company, the UK has various rights related to  citizenship requirements for the companies’ boards of directors, control  over the percentages of foreign-owned shares, or approval requirements  for the dissolution or disposal of any strategic assets. This share does not  give the government control over the companies’ routine business  activities, investment decisions, or appointments. The use of golden shares  faced a number of adverse decisions from the European Court of Justice  in 2002 and 2003, which ruled that the use of golden shares is acceptable  only in specific circumstances and with strict conditions. However, the UK  continues to use golden shares on the grounds of national security, and  does not intend to dispose of these shares in certain strategic areas.
Some prominent company specific limitations established in golden shares  include the following:    BAE Systems limits foreign ownership of voting stocks to 15 percent.    Rolls-Royce limits foreign ownership of voting stocks to 15 percent.
The British government’s consent is required for the disposal of the  company’s nuclear business or the group as a whole.
British Energy requires the consent of the government to allow a  purchase of more than 15 percent of its issued shares.
Other companies in which the government holds a golden share are  Rosyth Royal Dockyard Limited, Davenport Royal Dockyard Limited,  BAES (Marine) Limited, the Atomic Weapons Establishment, and  QinetiQ. Each company’s articles of association grant the government  various rights, including the ability to impose certain restrictions and  oversee major company decisions.

	Review Process

Government reviews of foreign investment are conducted by the Office of  Fair Trading (OFT). If the OFT determines that there is potential for anti- competitive consequences from the transaction, it refers the transaction to  the Competition Commission for further review. The Competition  Commission may consult with the parties to the transaction and normally  issues decisions in 30 days, although it is allowed 6 months to complete  the review. The Competition Commission can negotiate undertakings with  the investor as conditions for approval of the transaction. Once a  transaction is approved, the decision is final. It cannot be reopened,  modified, or reversed.
Prior to an official review, companies generally meet informally with the  relevant agency to discuss the potential transaction. For example, the  parties to a proposed transaction in the defense sector would normally  consult in advance with the UK Ministry of Defense and negotiate  acceptable undertakings so that Secretary of State would not need to issue  a notice of intervention. During the informal review process, the relevant  government offices consult with the investor and agree on undertakings.  According to a lawyer familiar with the UK review process, the formal  process primarily serves to provide a public comment period for the  decisions that have already been made as part of the informal process.  There is no requirement to notify the government of an investment before  a transaction is completed. The government has 4 months after a  transaction is completed to decide if it is necessary to intervene.

	New Developments

According to British government officials, no changes are currently being  considered to the United Kingdom’s policies regarding foreign investment.  It is possible that changes or additions to European Union policies in this  area could affect the United Kingdom. In 2006, the potential takeover of a  major oil company in the United Kingdom by a foreign state-owned oil  company caused public controversy. However, British government  officials discussed the potential transaction and decided that despite the  possible threat to the United Kingdom’s energy supply, the British  government would not intervene in the transaction on public security  grounds.
The United Kingdom’s Chancellor of the Exchequer outlined British policy  toward sovereign wealth funds investing in the United Kingdom in his first  speech as Chancellor. He stated that the United Kingdom welcomes  foreign investment, including that of state-owned enterprises. To  exemplify this openness, British government officials pointed out that all  of the United Kingdom’s ports are owned by Dubai Ports World.

Appendix XIV: GAO Contact and Staff Acknowledgments

	Staff Acknowledgments

In addition to the individual named above, Thomas Denomme, Assistant  Director; Walker Fullerton; Paula J. Haurilesko; John A. Krump; David G.  Lysy; John J. Marzullo; Heather Barker Miller; and Ron Schwenn made key  contributions to this report.

Summary:
Why GAO Did This Study

Foreign acquisitions of U.S. companies can pose a significant challenge for the U.S. government because of the need to balance the benefits of foreign investment with national security concerns. The Exon-Florio amendment to the Defense Production Act authorizes the President to suspend or prohibit foreign acquisitions of U.S. companies that may harm national security. To better understand how other countries deal with similar challenges, GAO was asked to identify how other countries address the issues that Exon-Florio is intended to address. Specifically, this report describes selected countries' (1) laws and policies enacted to regulate foreign investment to protect their national security interests and (2) implementation of those laws and policies. This report updates a 1996 GAO report that describes how four major foreign investors in the United States--France, Germany, Japan, and the United Kingdom--monitored foreign investment in their own countries to protect national security interests. It also examines foreign investment in six additional countries: Canada, China, India, the Netherlands, Russia, and the United Arab Emirates (UAE). GAO reviewed selected laws and regulations and interviewed foreign government officials and others concerning their implementation and any planned changes to their foreign investment laws, regulations, and policies.

What GAO Found

As is the case in the United States, the countries we reviewed have enacted laws and instituted policies regulating foreign investment, often to address national security concerns. However, each of the 10 countries has its own concept of national security that influences which particular investments may be restricted. As a result of the differing concepts, restrictions range from requiring approval of investments in a narrowly defined defense sector to broad restrictions on the basis of economic security and cultural policy. In addition, some countries have recently made changes to their laws and policies to more explicitly identify national security as an area of concern, in some cases as the result of controversial investments. Several countries have also introduced lists of strategic sectors in which foreign investment requires government review and approval. While there are many unique characteristics of the systems employed by the 10 countries to regulate foreign investment, in many ways the systems are similar to each other, and to the U.S. process under Exon-Florio. Eight countries use a formal review process--usually conducted by a government economic body with input from government security bodies--to review a transaction. Generally, national security is a primary factor or one of several factors considered in evaluating transactions. While the concepts of national security vary from country to country, all countries share concerns about a core set of issues. These include, for example, the defense industrial base, and more recently, investment in the energy sector and investment by state-owned enterprises and sovereign wealth funds. Most countries have established time frames for the review and can place conditions on transactions prior to approval. For example, a country may place national citizenship requirements on company board members. However, unlike the voluntary notification under Exon-Florio, most countries' reviews are mandatory if the investment reaches certain dollar thresholds or if the buyer will obtain a controlling or blocking share in the acquired company. Further, unlike the United States, five countries allow decisions to be appealed through administrative means or in court. Two countries do not have a formal review process. The Netherlands restricts entry into certain sectors such as public utilities, and the UAE restricts the extent of ownership allowed in all sectors without a review. In addition to the formal mechanisms, there are unofficial factors that may influence investment in each of the 10 countries. For example, in some countries an informal government preapproval for sensitive transactions may be needed. In commenting on a draft of this report, the Department of the Treasury emphasized the United States' commitment to an open investment policy.