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 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. 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. 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. 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 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. 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. 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. 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.