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The Committee on Foreign Investment in the United States (CFIUS)

CRS Report for Congress
Prepared for Members and Committees of Congress
The Committee on Foreign Investment in the
United States (CFIUS)
James K. Jackson
Specialist in International Trade and Finance
March 29, 2013
Congressional Research Service
7-5700
www.crs.gov
RL33388
The Committee on Foreign Investment in the United States (CFIUS)
Congressional Research Service
Summary
The Committee on Foreign Investment in the United States (CFIUS) is comprised of nine
members, two ex officio members, and other members as appointed by the President representing
major departments and agencies within the federal executive branch. While the group generally
has operated in relative obscurity, the proposed acquisition of commercial operations at six U.S.
ports by Dubai Ports World in 2006 placed the group’s operations under intense scrutiny by
Members of Congress and the public. Prompted by this case, some Members of the 109th and
110th Congresses questioned the ability of Congress to exercise its oversight responsibilities given
the general view that CFIUS’s operations lack transparency. Other Members revisited concerns
about the linkage between national security and the role of foreign investment in the U.S.
economy. Some Members of Congress and others argued that the nation’s security and economic
concerns have changed since the September 11, 2001, terrorist attacks and that these concerns
were not being reflected sufficiently in the Committee’s deliberations. In addition, anecdotal
evidence seemed to indicate that the CFIUS process was not market neutral. Instead, a CFIUS
investigation of an investment transaction may have been perceived by some firms and by some
in the financial markets as a negative factor that added to uncertainty and may have spurred firms
to engage in behavior that may not have been optimal for the economy as a whole. In the 112th
Congress, some Members expressed their concerns to the Obama Administration over the
national security implications of a proposed acquisition of a U.S. technology company by the
Chinese-owned Huawei Technologies.
In the first session of the 110th Congress, the House and Senate adopted S. 1610, the Foreign
Investment and National Security Act (FINSA) of 2007. On July 11, 2007, the measure was sent
to President Bush, who signed it on July 26, 2007. It is designated as P.L. 110-49. On January
23, 2008, President Bush issued Executive Order 13456 implementing the law. The Executive
Order also established some caveats that may affect the way in which the law is implemented.
These caveats stipulate that the President will provide information that is required under the law
as long as it is “consistent” with the President’s authority “to (i) conduct the foreign affairs of the
United States; (ii) withhold information the disclosure of which could impair the foreign
relations, the national security, the deliberative processes of the Executive, or the performance of
the Executive’s constitutional duties; (iii) recommend for congressional consideration such
measures as the President may judge necessary and expedient; and (iv) supervise the unitary
executive branch.” Despite the relatively recent passage of the amendments, some Members of
Congress and others have questioned the performance of CFIUS and the way the Committee
reviews cases involving foreign governments, particularly with the emergence of direct
investments through sovereign wealth funds (SWFs). The Obama Administration issued a
statement on June 30, 2011, supporting an open investment policy, a commitment to treat all
investors in a fair and equitable manner, and support for business investment from sources both
home and abroad in the economy. On September 28, 2012, President Obama used the authority
granted to him under FINSA to block a Chinese acquisition of a U.S. energy firm.
The Committee on Foreign Investment in the United States (CFIUS)
Congressional Research Service
Contents
Background ...................................................................................................................................... 1
Establishment of CFIUS .................................................................................................................. 2
The “Exon-Florio” Provision ........................................................................................................... 3
Treasury Department Regulations ................................................................................................... 5
The “Byrd Amendment” .................................................................................................................. 6
The Amended CFIUS Process ......................................................................................................... 7
Cases .......................................................................................................................................... 9
Covered Transactions .............................................................................................................. 10
Control ..................................................................................................................................... 11
Procedures ............................................................................................................................... 12
Presidential Authority .............................................................................................................. 13
Factors for Consideration ........................................................................................................ 14
Confidentiality Requirements .................................................................................................. 15
Mitigation and Tracking .......................................................................................................... 16
Congressional Oversight ......................................................................................................... 17
CFIUS Since Exon-Florio .............................................................................................................. 18
Recent Transactions ....................................................................................................................... 19
Impact of the Exon-Florio Process on CFIUS ............................................................................... 21
Conclusions .................................................................................................................................... 23
Tables
Table 1. Merger and Acquisition Activity in the United States, 1996-2011 .................................. 18
Table 2. Foreign Investment Transactions Reviewed by CFIUS, 2008-2010 ................................ 19
Table 3. Industry Composition of Foreign Investment Transactions Reviewed by CFIUS,
2008-2010 ................................................................................................................................... 20
Table 4. Country of Foreign Investor and Industry Reviewed by CFIUS, 2008-2010 .................. 20
Contacts
Author Contact Information........................................................................................................... 26
The Committee on Foreign Investment in the United States (CFIUS)
Congressional Research Service 1
Background
The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee
that serves the President in overseeing the national security implications of foreign investment in
the economy. Originally established by an Executive Order of President Ford in 1975, the
committee generally has operated in relative obscurity.1 According to a Treasury Department
memorandum, the Committee originally was established in order to placate Congress, which had
grown concerned over the rapid increase in investments by Organization of the Petroleum
Exporting Countries (OPEC) countries in American portfolio assets (Treasury securities,
corporate stocks and bonds), and to respond to concerns of some that much of the OPEC
investments were being driven by political, rather than by economic, motives.2
Thirty years later, public and congressional concerns about the proposed purchase of commercial
port operations of the British-owned Peninsular and Oriental Steam Navigation Company (P&O)3
in six U.S. ports by Dubai Ports World (DP World)4 sparked a firestorm of criticism and
congressional activity during the 109th Congress concerning CFIUS and the manner in which it
operates. Some Members of Congress and the public argued that the nation’s economic and
national security concerns had fundamentally changed as a result of the September 11, 2001,
terrorist attacks on the United States and that these changes required a reassessment of the role of
foreign investment in the economy and in the nation’s security. As a result of the attention by both
the public and Congress, DP World officials announced that they would sell off the U.S. port
operations to an American owner.5 On December 11, 2006, DP World officials announced that a
unit of AIG Global Investment Group, a New York-based asset management company with large
assets, but no experience in port operations, would acquire the U.S. port operations for an
undisclosed amount.6
Members of Congress introduced more than 25 bills in the second session of the 109th Congress
that addressed various aspects of foreign investment since the proposed DP World transaction. In
the first session of the 110th Congress, Members approved, and President Bush signed, a measure
that was designated as P.L. 110-49 that alters the CFIUS process in order to provide greater
oversight by Congress and increased reporting by the Committee on its decisions. In addition,
P.L. 110-49 broadened the definition of national security and required greater scrutiny by CFIUS
of certain types of foreign direct investments. The law demonstrated the concern some Members
1 Executive Order 11858 (b), May 7, 1975, 40 F.R. 20263.
2 U.S. Congress. House. Committee on Government Operations. Subcommittee on Commerce, Consumer, and
Monetary Affairs. The Operations of Federal Agencies in Monitoring, Reporting on, and Analyzing Foreign
Investments in the United States. Hearings. 96th Cong., 1st sess., Part 3, July 30, 1979. Washington: GPO, 1979. p. 334-
335. (Hereinafter cited as, The Operations of Federal Agencies, part 3.)
3 Peninsular and Oriental Steam Company is a leading ports operator and transport company with operations in ports,
ferries, and property development. It operates container terminals and logistics operations in over 100 ports and has a
presence in 18 countries.
4 Dubai Ports World was created in November 2005 by integrating Dubai Ports Authority and Dubai Ports
International. It is one of the largest commercial port operators in the world with operations in the Middle East, India,
Europe, Asia, Latin America, the Caribbean, and North America.
5 Weisman, Jonathan, and Bradley Graham, “Dubai Firm to Sell U.S. Port Operations,” The Washington Post, March
10, 2006. p. A1.
6 King, Neil Jr., and Greg Hitt, Dubai Ports World Sells U.S. Assets—AIG Buys Operations that Ignited Controversy
As Democrats Plan Changes. The Wall Street Journal, December 12, 2006. p. A1.
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had with the way CFIUS operated and with the lack of transparency in the CFIUS review process
that some Members believed had hampered Congress’s ability to exercise its oversight
responsibilities. Not all Members were satisfied with the law. Some Members argued that the law
remained deficient in reviewing investment by foreign governments through sovereign wealth
funds (SWFs), an issue that was just beginning to attract attention when the law was adopted. In
early 2011, some Members of Congress had requested that the Obama Administration support a
recommendation by CFIUS that the President block a proposed acquisition of 3Leaf Systems by
Huawei Technologies over national security concerns. Instead, Huawei discontinued its efforts to
acquire the U.S. firm.
Establishment of CFIUS
President Ford’s 1975 Executive Order established the basic structure of CFIUS, and directed that
the “representative”7 of the Secretary of the Treasury be the chairman of the Committee. The
Executive Order also stipulated that the Committee would have “the primary continuing
responsibility within the executive branch for monitoring the impact of foreign investment in the
United States, both direct and portfolio, and for coordinating the implementation of United States
policy on such investment.” In particular, CFIUS was directed to (1) arrange for the preparation
of analyses of trends and significant developments in foreign investments in the United States; (2)
provide guidance on arrangements with foreign governments for advance consultations on
prospective major foreign governmental investments in the United States; (3) review investments
in the United States which, in the judgment of the Committee, might have major implications for
United States national interests; and (4) consider proposals for new legislation or regulations
relating to foreign investment as may appear necessary.8
President Ford’s Executive Order also stipulated that information submitted “in confidence shall
not be publicly disclosed” and that information submitted to CFIUS be used “only for the purpose
of carrying out the functions and activities” of the order. In addition, the Secretary of Commerce
was directed to perform a number of activities, including
(1) obtaining, consolidating, and analyzing information on foreign investment in the United
States;
(2) improving the procedures for the collection and dissemination of information on such
foreign investment;
(3) the close observing of foreign investment in the United States;
(4) preparing reports and analyses of trends and of significant developments in appropriate
categories of such investment;
(5) compiling data and preparing evaluation of significant transactions; and
(6) submitting to the Committee on Foreign Investment in the United States appropriate
reports, analyses, data, and recommendations as to how information on foreign investment
can be kept current.
7 The term “representative” was dropped by Executive Order 12661, December 27, 1988, 54 FR 780.
8 Executive Order 11858 (b), May 7, 1975, 40 F.R. 20263.
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The Executive Order, however, raised questions among various observers and government
officials who doubted that federal agencies had the legal authority to collect the types of data that
were required by the order. As a result, Congress and the President sought to clarify this issue,
and in the following year President Ford signed the International Investment Survey Act of 1976.9
The act gave the President “clear and unambiguous authority” to collect information on
“international investment.” In addition, the act authorized “the collection and use of information
on direct investments owned or controlled directly or indirectly by foreign governments or
persons, and to provide analyses of such information to the Congress, the executive agencies, and
the general public.”10
By 1980, some Members of Congress had come to believe that CFIUS was not fulfilling its
mandate. Between 1975 and 1980, for instance, the Committee had met only 10 times and seemed
unable to decide whether it should respond to the political or the economic aspects of foreign
direct investment in the United States.11 One critic of the Committee argued in a congressional
hearing in 1979 that, “the Committee has been reduced over the last four years to a body that only
responds to the political aspects or the political questions that foreign investment in the United
States poses and not with what we really want to know about foreign investments in the United
States, that is: Is it good for the economy?”12
From 1980 to 1987, CFIUS investigated a number of foreign investments, mostly at the request of
the Department of Defense. In 1983, for instance, a Japanese firm sought to acquire a U.S.
specialty steel producer. The Department of Defense subsequently classified the metals produced
by the firm because they were used in the production of military aircraft, which caused the
Japanese firm to withdraw its offer. Another Japanese company attempted to acquire a U.S. firm
in 1985 that manufactured specialized ball bearings for the military. The acquisition was
completed after the Japanese firm agreed that production would be maintained in the United
States. In a similar case in 1987, the Defense Department objected to a proposed acquisition of
the computer division of a U.S. multinational company by a French firm because of classified
work engaged in by the computer division. The acquisition proceeded after the classified
contracts were reassigned to the U.S. parent company.13
The “Exon-Florio” Provision
In 1988, amid concerns over foreign acquisition of certain types of U.S. firms, particularly by
Japanese firms, Congress approved the Exon-Florio provision.14 This statute grants the President
the authority to block proposed or pending foreign “mergers, acquisitions, or takeovers” of
“persons engaged in interstate commerce in the United States” that threaten to impair the national
9 P.L. 94-472, Oct 11, 1976; 22 USC 3101.
10 P.L. 94-472, Oct 11, 1976; 22 USC Section 3101(b).
11 U.S. Congress. House. Committee on Government Operations. The Adequacy of the Federal Response to Foreign
Investment in the United States. Report by the Committee on Government Operations. H.Rept. 96-1216, 96th Cong., 2nd
sess., Washington: GPO, 1980. 166-184.
12 The Operations of Federal Agencies, part 3, p. 5.
13 U.S. Congress. House. Committee on Energy and Commerce. Subcommittee on Commerce, Consumer Protection,
and Competitiveness. Foreign Takeovers and National Security. Hearings on Section 905 of H.R. 3. 100th Cong., 1st
sess., October 20, 1987. Testimony of David C. Mulford. Washington: GPO, 1988. p. 21-22.
14 P.L. 100-418, title V, Section 5021, August 23, 1988; 50 USC Appendix sect. 2170.
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security. Congress directed, however, that before this authority can be invoked the President must
conclude that other U.S. laws are inadequate or inappropriate to protect the national security, and
that he must have “credible evidence” that the foreign investment will impair the national
security. This same standard was maintained in P.L. 110-49.
By the late 1980s, Congress and the public had grown increasingly concerned about the sharp
increase in foreign investment in the United States and the potential impact such investment
might have on the U.S. economy. In particular, the proposed sale in 1987 of Fairchild
Semiconductor Co. by Schlumberger Ltd. of France to Fujitsu Ltd. of Japan touched off strong
opposition in Congress and provided much of the impetus behind the passage of the Exon-Florio
provision. The proposed Fairchild acquisition generated intense concern in Congress in part
because of general difficulties in trade relations with Japan at that time and because some
Americans felt that the United States was declining as an international economic power as well as
a world power. The Defense Department opposed the acquisition because some officials believed
that the deal would give Japan control over a major supplier of computer chips for the military
and would make U.S. defense industries more dependent on foreign suppliers for sophisticated
high-technology products.15
Although Commerce Secretary Malcolm Baldridge and Defense Secretary Caspar Weinberger
failed in their attempt to have President Reagan block the Fujitsu acquisition, Fujitsu and
Schlumberger called off the proposed sale of Fairchild.16 While Fairchild was acquired some
months later by National Semiconductor Corp. for a discount,17 the Fujitsu-Fairchild incident
marked an important shift in the Reagan Administration’s support for unlimited foreign direct
investment in U.S. businesses and boosted support within the Administration for fixed guidelines
for blocking foreign takeovers of companies in national security-sensitive industries.18
In 1988, after three years of often contentious negotiations between Congress and the Reagan
Administration, Congress passed and President Reagan signed the Omnibus Trade and
Competitiveness Act of 1988.19 The Exon-Florio provision, which was included as Section 5021
of that act, fundamentally transformed CFIUS. The provision originated in bills reported by the
Commerce Committee in the Senate and the Energy and Commerce Committee in the House, but
the measure was transferred to the Senate Banking Committee as a result of a dispute over
jurisdictional responsibilities.20 In 1990, President Bush, using the authority granted under the
Exon-Florio provision, directed the China National Aero-Technology Import and Export
Corporation (CATIC) to divest its acquisition of MAMCO Manufacturing, a Seattle-based firm
producing metal parts and assemblies for aircraft, because of concerns that CATIC might gain
access to technology through Mamco that it would otherwise have to obtain under an export
license.21
15 Auerbach, Stuart. Cabinet to Weigh Sale of Chip Firm. The Washington Post, March 12, 1987. p. E1.
16 Sanger, David E. Japanese Purchase of Chip Maker Canceled After Objections in U.S. The New York Times, March
17, 1987. p. 1.
17 Pollack, Andrew. Schlumberger Accepts Offer. The New York Times, September 1, 1987. p. D1.
18 Kilborn, Peter T. Curb Asked On Foreign Takeovers. The New York Times, March 18, 1987. p. D1.
19 P.L. 100-418.
20 Testimony of Patrick A. Mulloy before the Committee on Banking, Housing, & Urban Affairs, October 20, 2005.
21 Auerbach, Stuart. “President Tells China to Sell Seattle Firm.” The Washington Post, February 8, 1990, p. A1; and
Benham, Barbara. “Blocked Takeover Fuels Foreign Policy Flap.” Investor’s Daily, February 8, 1990. p. 1.
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Part of Congress’s motivation in adopting the Exon-Florio provision apparently arose from
concerns that foreign takeovers of U.S. firms could not be stopped unless the President declared a
national emergency or regulators invoked federal antitrust, environmental, or securities laws.
Through the Exon-Florio provision, Congress attempted to strengthen the President’s hand in
conducting foreign investment policy, while limiting its own role as a means of emphasizing that,
as much as possible, the commercial nature of investment transactions should be free from
political considerations. Congress also attempted to balance public concerns about the economic
impact of certain types of foreign investment with the nation’s long-standing international
commitment to maintaining an open and receptive environment for foreign investment.
Furthermore, Congress did not intend to have the Exon-Florio provision alter the generally open
foreign investment climate of the country or to have it inhibit foreign direct investments in
industries that could not be considered to be of national security interest. At the time, some
analysts believed the provision could potentially widen the scope of industries that fell under the
national security rubric. CFIUS, however, is not free to establish an independent approach to
reviewing foreign investment transactions, but operates under the authority of the President and
reflects his attitudes and policies. As a result, the discretion CFIUS uses to review and to
investigate foreign investment cases reflects policy guidance from the President. Foreign
investors also are constrained by legislation that bars foreign direct investment in such industries
as maritime, aircraft, banking, resources, and power.22 Generally, these sectors were closed to
foreign investors prior to passage of the Exon-Florio provision in order to prevent public services
and public interest activities from falling under foreign control, primarily for national defense
purposes.
Through Executive Order 12661, President Reagan implemented provisions of the Omnibus
Trade Act. In the Executive Order, President Reagan delegated his authority to administer the
Exon-Florio provision to CFIUS,23 particularly to conduct reviews, to undertake investigations,
and to make recommendations, although the statute itself does not specifically mention CFIUS.
As a result of President Reagan’s action, CFIUS was transformed from a purely administrative
body with limited authority to review and analyze data on foreign investment to one with a broad
mandate and significant authority to advise the President on foreign investment transactions and
to recommend that some transactions be blocked.
Treasury Department Regulations
After extensive public comment, the Treasury Department issued its final regulations in
November 1991 implementing the Exon-Florio provision.24 Although these procedures were
amended through P.L. 110-49, they continued to serve as the basis for the Exon-Florio review
and investigation until new regulations were released on November 21, 2008.25 These regulations
created an essentially voluntary system of notification by the parties to an acquisition and they
allowed for notices of acquisitions by agencies that are members of CFIUS. Despite the voluntary
nature of the notification, firms largely comply with the provision, because the regulations
22 CRS Report RL33103, Foreign Investment in the United States: Major Federal Statutory Restrictions, by Michael V.
Seitzinger.
23 Executive Order 12661 of December 27, 1988, 54 F.R. 779.
24 Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. 31 C.F.R. Part 800.
25 31 CFR Part 800, November 21, 2008.
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stipulate that foreign acquisitions that are governed by the Exon-Florio review process that do not
notify the Committee remain subject indefinitely to divestment or other appropriate actions by the
President. Under most circumstances, notice of a proposed acquisition that is given to the
Committee by a third party, including shareholders, is not considered by the Committee to
constitute an official notification. The regulations also indicated that notifications provided to the
Committee would be considered to be confidential and the information would not be released by
the Committee to the press or commented on publicly.
The “Byrd Amendment”
In 1992, Congress amended the Exon-Florio statute through Section 837(a) of the National
Defense Authorization Act for Fiscal Year 1993 (P.L. 102-484). Known as the “Byrd”
amendment after the amendment’s sponsor, the provision requires CFIUS to investigate proposed
mergers, acquisitions, or takeovers in cases where two criteria are met:
(1) the acquirer is controlled by or acting on behalf of a foreign government; and
(2) the acquisition results in control of a person engaged in interstate commerce in the United
States that could affect the national security of the United States.26
This amendment came under intense scrutiny by the 109th Congress as a result of the DP World
transaction. Many Members of Congress and others believed that this amendment required
CFIUS to undertake a full 45-day investigation of the transaction because DP World was
“controlled by or acting on behalf of a foreign government.” The DP World acquisition, however,
exposed a sharp rift between what some Members apparently believed the amendment directed
CFIUS to do and how the members of CFIUS were interpreting the amendment. In particular,
some Members of Congress apparently interpreted the amendment to direct CFIUS to conduct a
mandatory 45-day investigation if the foreign firm involved in a transaction is owned or
controlled by a foreign government. Representatives of CFIUS argued that they interpreted the
amendment to mean that a 45-day investigation was discretionary and not mandatory. In the case
of the DP World acquisition, CFIUS representatives argued that they had concluded as a result of
an extensive review of the proposed acquisition prior to the case being formally filed with CFIUS
and during the 30-day review that the DP World case did not warrant a full 45-day investigation.
They conceded that the case met the first criterion under the Byrd amendment, because DP World
was controlled by a foreign government, but that it did not meet the second part of the
requirement, because CFIUS had concluded during the 30-day review that the transaction “could
not affect the national security.”27
The intense public and congressional reaction that arose from the proposed Dubai Ports World
acquisition spurred the Bush Administration in late 2006 to make an important administrative
change in the way CFIUS reviewed foreign investment transactions. CFIUS and President Bush
approved the acquisition of Lucent Technologies, Inc. by the French-based Alcatel SA, which was
completed on December 1, 2006. Before the transaction was approved by CFIUS, however,
Alcatel-Lucent was required to agree to a national security arrangement, known as a Special
26 P.L. 102-484, October 23, 1992.
27 Briefing on the Dubai Ports World Deal before the Senate Armed Services Committee, February 23, 2006.
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Security Arrangement, or SSA, that restricts Alcatel’s access to sensitive work done by Lucent’s
research arm, Bell Labs, and the communications infrastructure in the United States.
The most controversial feature of this arrangement is that it allows CFIUS to reopen a review of
the deal and to overturn its approval at any time if CFIUS believed the companies “materially fail
to comply” with the terms of the arrangement. This marks a significant changed in the CFIUS
process. Prior to this transaction, CFIUS reviews and investigations had been portrayed, and had
been considered, to be final. As a result, firms were willing to subject themselves voluntarily to a
CFIUS review, because they believed that once an investment transaction was scrutinized and
approved by the members of CFIUS the firms could be assured that the investment transaction
would be exempt from any future reviews or actions. This administrative change, however, meant
that a CFIUS determination may no longer be a final decision and it added a new level of
uncertainty to foreign investors seeking to acquire U.S. firms. A broad range of U.S. and
international business groups objected to this change in the Bush Administration’s policy.28
The Amended CFIUS Process
In the first session of the 110th Congress, Representative Maloney introduced H.R. 556, the
National Security Foreign Investment Reform and Strengthened Transparency Act of 2007, on
January 18, 2007. The measure was approved by the House Financial Services Committee on
February 13, 2007, with amendments, and was approved with additional amendments by the full
House on February 28, 2007, by a vote of 423 to 0. On June 13, 2007, Senator Dodd introduced
S. 1610, the Foreign Investment and National Security Act of 2007. On June 29, 2007, the Senate
adopted S. 1610 in lieu of H.R. 556 by unanimous consent. On July 11, 2007, the House
accepted the Senate’s version of H.R. 556 by a vote of 370-45 and sent the measure to the
President, who signed it on July 26, 2007. It is designated as P.L. 110-49. On January 23, 2008,
President Bush issued Executive Order 13456 implementing the law. The Executive Order makes
a number of substantive changes to the law. This report incorporates the changes made by this
statute and by the Executive Order.
P.L. 110-49 establishes CFIUS by statutory authority and has the Secretary of the Treasury serve
as the Chairman of CFIUS. The measure follows the same pattern that was set by Executive
Order by allotting the Committee 30 days to conduct a review, 45 days to conduct an
investigation, and 15 days for the President to make his determination. The President retains his
authority as the only officer with the authority to suspend or prohibit mergers, acquisitions, and
takeovers, and the measure places additional requirements on firms that resubmitted a filing after
previously withdrawing a filing before a full review is completed.
Over time, the three step Exon-Florio process apparently had evolved to include an informal stage
of unspecified length of time that consists of an unofficial CFIUS determination prior to the
formal filing with CFIUS. This type of informal review had developed because it likely served
the interests of both CFIUS and the firms that were involved in an investment transaction.
According to Treasury Department officials, this informal contact enabled “CFIUS staff to
28 Kirchgaessner, Stephanie, US Threat to Reopen Terms of Lucent and Alcatel Deal Mergers, Financial Times,
December 1, 2006. P. 19; Pelofsky, Jeremy, Businesses Object to US move on foreign Investment, Reuters News,
December 5, 2006.
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identify potential issues before the review process formally begins.”29 This informal process has
continued under the provisions of P.L. 110-49.
Firms that are party to an investment transaction apparently have benefitted from this informal
review in a number of ways. For one, it allowed firms additional time to work out any national
security concerns privately with individual CFIUS members. Secondly, and perhaps more
importantly, it provided a process for firms to avoid risking potential negative publicity that could
arise if a transaction were to be blocked or otherwise labeled as impairing U.S. national security
interests. For some firms, public knowledge of a CFIUS investigation has had a negative effect on
the value of the firm’s stock price.
For CFIUS members, the informal process has been beneficial because it has given them as much
time as they have felt was necessary to review a transaction without facing the time constraints
that arise under the formal CFIUS review process. This informal review likely has also given the
CFIUS members added time to negotiate with the firms involved in a transaction to restructure
the transaction in ways that have addressed any potential security concerns or to develop other
types of conditions that members feel are appropriate in order to remove security concerns.
On January 23, 2008, President Bush issued Executive Order 13456, which implemented P.L.
110-49 and made various changes to the law. The Committee consists of nine members,
including the Secretaries of State, the Treasury, Defense, Homeland Security, Commerce, and
Energy; the Attorney General; the United States Trade Representative; and the Director of the
Office of Science and Technology Policy.30 The Secretary of Labor and the Director of National
Intelligence serve as ex officio members of the Committee.31 The Executive Order 13456 also
added five more members to CFIUS in order to “observe and, as appropriate, participate in and
report to the President:” the Director of the Office of Management and Budget, the Chairman of
the Council of Economic Advisors, the Assistant to the President for National Security Affairs,
the Assistant to the President for Economic Policy, and the Assistant to the President for
Homeland Security and Counterterrorism. The President can also appoint temporary members to
the Committee as he determines.
29 Testimony of Robert Kimmett, Briefing on the Dubai Ports World Deal Before the Senate Armed Services
Committee, February 23, 2006.
30 The United States Trade Representative and the Director of the Office of Science and Technology Policy were added
through E.O. 13456, issued January 23, 2008.
31 Executive Order 11858 of May 7, 1975, 40 F.R. 20263 established the Committee with six members: the Secretaries
of State, the Treasury, Defense, Commerce, and the Assistant to the President for Economic Affairs, and the Executive
Director of the Council on International Economic Policy. Executive Order 12188, January 2, 1980, 45 F.R. 969, added
the United States Trade Representative and substituted the Chairman of the Council of Economic Advisors for the
Executive Director of the Council on International Economic Policy. Executive Order 12661, December 27, 1988, 54
F.R. 779, added the Attorney General and the Director of the Office of Management and Budget. Executive Order
12860, September 3, 1993, 58 F.R. 47201, added the Director of the Office of Science and Technology Policy, the
Assistant to the President for National Security Affairs, and the Assistant to the President for Economic Policy.
Executive Order 13286, Section 57, February 28, 2003, added the Secretary of Homeland Security. P.L. 110-49
reduced the membership of CFIUS to six Cabinet members and the Attorney General, it added the Secretary of Labor
and the Director of National Security as ex officio members, and removed seven White House appointees.
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Cases
In addition to the Dubai Ports cases, a number of investment transactions have attracted public
and Congressional attention. After a lengthy review by CFIUS in 2000, Verio, Inc., a U.S. firm
that operates websites for businesses and provides internet services, was acquired by NTT
Communications of Japan. Verio’s stock price reportedly fell during the CFIUS investigation as a
result of uncertainty in the market about prospects for the transaction. The CFIUS review was
instigated by the FBI, which had expressed concerns during the initial review stage that the
majority interest of the Japanese government in NTT could give it access to information
regarding wiretaps that were being conducted on email and other Web-based traffic crossing
Verio’s computer system. After completing its investigation, however, CFIUS did not recommend
that President Clinton block the transaction.
The potentially negative publicity that can be associated with a CFIUS investigation of a
transaction apparently has had a major impact on the transactions CFIUS has investigated. Since
1990, nearly half of the transactions CFIUS investigated were terminated by the firms involved,
because the firms decided to withdraw from the transactions rather than face a negative
determination by CFIUS. In 2006, for instance, the prospect of a CFIUS investigation apparently
was the major reason the Israeli firm Check Point Software Technologies decided to call off its
proposed $225 million acquisition of Sourcefire, a U.S. firm specializing in security appliances
for protecting a corporation’s internal computer networks. In addition, the decision by the China
National Offshore Oil Company (CNOOC) to drop its proposed acquisition of Unocal oil
company in 2005 was partly due to concerns by CNOOC about an impending CFIUS
investigation of the transaction.
Between December 2009 and July 2010, two Chinese firms withdrew their proposed acquisitions
of U.S. firms due to opposition from at least one CFIUS agency. In December 2009, the Chinese
firm Northwest Nonferrous International Investment Corp., a subsidiary of China’s largest
aluminum producer, attempted to acquire U.S.-based Firstgold due to objections by the U.S.
Department of the Treasury that Firstgold had properties near sensitive military bases. In June
2010, China’s Tangshan Caofedian Investment Corporation withdrew its proposed acquisition of
Emcore, which makes components for fiber optics and solar panels, due to “regulatory
concerns.”32
In 2012, two investments by Chinese firms attracted public and congressional attention: an
investment by the Chinese firm Sany Group in a wind farm project, known as the Butter Creek
Projects, in Oregon by Ralls Corp.; and Wanxiang’s acquisition of battery-maker A123 Systems
Inc. In March 2012, Ralls acquired the wind farm assets from Terna Energy SA, an Athens,
Greece-based company, without reporting the transaction to CFIUS. In June, 2012, CFIUs
contacted Ralls and requested the firm file a voluntary notification to have its investment
retroactively reviewed. After reviewing the acquisition, CFIUS recommended that Ralls stop
operations until a complete investigation could be completed as a result of objections by the U.S.
Navy over the placement of wind turbines by Ralls near or within restricted Naval Weapons
Systems Training Facility airspace where drones (unmanned aerial vehicles) are tested. After a
full investigation, CFIUS recommended that President Obama block the investment by ordering a
divestment of the transaction and imposed other requirements on Ralls to remove equipment it
had installed.
32 Kirchgaessner, Stephanie, US Blocks China Fibre Optics Deal Over Security, Financial Times, June 30, 2010.
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On September 28, 2012, President Obama issued an executive order33 that argued that there was
credible evidence that the Ralls acquisition threatened to impair U.S. national security and
ordered Ralls to divest itself of the Oregon wind farm project. In response, the Ralls Corporation
filed a suit on October 1, 2012 challenging the Obama Administration’s authority to block the
investment. On February 22, 2013, the United States District Court for the District of Columbia
dismissed the suit by ruling that the court lacked jurisdiction, since the CFIUS statute states that
the President’s decisions are not subject to judicial review, known as a finality provision.34 Ralls
argued that the President was authorized only to “suspend of prohibit” a transaction, not to order
a removal of equipment or a divesture.
The court ruled, however that the statute grants the President broad authority by authorizing him
to take “such action for such time” as he considers appropriate. The suit also argued that Ralls
was treated unfairly under the Due Process Clause of the Fifth Amendment, but the court ruled
that it lacked jurisdiction on this motion as well by the CFIUS statute. Nevertheless, the court
indicated that its ruling would not prohibit Ralls’ due process claim to proceed. The Ralls’ due
process claim apparently focused on whether the President and/or CFIUS should be required to
provide companies that proceed through the CFIUS review and investigation process with an
opportunity to review, respond to, and rebut any evidence used to make a Presidential
Determination. One issue involved in requiring access to such information is the fact that CFIUS’
analysis for any particular transaction is based on classified information that generally is not
available to the public. Ralls has appealed the case.
In another case, China’s Wanxiang Group received approval in January 2013 from CFIUS to
acquire electric car battery maker A123 Systems. Wanxiang outbid other potential buyers by
offering to pay $257 million for the U.S. company. Some Members of Congress and the Strategic
Materials Advisory Council argued against the acquisitions on the grounds that it could
jeopardize the nation’s energy security. Others opposed the acquisition because A123 Systems
had received nearly $250 million in a federal grant to support clean energy, although half of the
grant was never released. A123 Systems manufactures lithium-ion batteries for Fisker
Automotive, BMW hybrid 3- and 5-series cars, and the all-electric Chevrolet Spark.
Covered Transactions
The law requires CFIUS to review all “covered” foreign investment transactions to determine
whether a transaction threatens to impair the national security, or the foreign entity is controlled
by a foreign government, or it would result in control of any “critical infrastructure that could
impair the national security.” A covered foreign investment transaction is defined as any merger,
acquisition, or takeover which results in “foreign control of any person engaged in interstate
commerce in the United States.” According to Treasury Department regulations, investment
transactions that are not considered to be covered transactions under the Exon-Florio provision
and, therefore, not subject to a CFIUS review are those that are undertaken “solely for the
purpose of investment, ” or an investment in which the foreign investor has “no intention of
determining or directing the basic business decisions of the issuer.” In addition, investments that
33 Order Signed by the President Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls
Corporation, The White House, September 28, 2012. Available at http://www.whitehouse.gov/the-press-office/2012/
09/28/order-signed-president-regarding-acquisition-four-us-wind-farm-project-c.
34 Ralls Corporation vs. Committee on Foreign Investment in the United States, et al., Civil Action Number 12-1513;
available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv1513-46.
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are solely for investment purposes are defined as those (1) in which the transaction does not
involve owning more than 10% of the voting securities of the firm; or (2) those investments that
are undertaken directly by a bank, trust company, insurance company, investment company,
pension fund, employee benefit plan, mutual fund, finance company, or brokerage company “in
the ordinary course of business for its own account.”35 Other transactions that are not covered
include (1) stock splits or pro rata stock dividend that does not involve a change in control; (2) an
acquisition of any part of an entity or of assets that do not constitute a U.S. business; (3) an
acquisition of securities by a person acting as a securities underwriter, in the ordinary course of
business and in the process of underwriting; and an acquisition pursuant to a condition in a
contract of insurance relating to fidelity, surety, or casualty obligations if the contract was made
by an insurer in the ordinary course of business. In addition, the Treasury regulations also
stipulate that the extension of a loan or a similar financing arrangement by a foreign person to a
U.S. business will not be considered a covered transaction and will not be investigated, unless the
loan conveys a right to the profits of the U.S. business or involves a transfer of management
decisions.
Control
The statute itself does not provide a definition of the term “control,” but such a definition is
included in the Treasury Department’s regulations. According to those regulations, control is not
defined as a numerical benchmark,36 but instead focuses on a functional definition of control, or a
definition that is governed by the influence the level of ownership permits the foreign entity to
affect certain decisions by the firm. According to the Treasury Department’s regulations:
The term control means the power, direct or indirect, whether or not exercised, and whether
or not exercised or exercisable through the ownership of a majority or a dominant minority
of the total outstanding voting securities of an issuer, or by proxy voting, contractual
arrangements or other means, to determine, direct or decide matters affecting an entity; in
particular, but without limitation, to determine, direct, take, reach or cause decisions
regarding:
(1) The sale, lease, mortgage, pledge or other transfer of any or all of the principal assets of
the entity, whether or not in the ordinary course of business;
(2) The reorganization, merger, or dissolution of the entity;
(3) The closing , relocation, or substantial alternation of the production operational, or
research and development facilities of the entity;
35 31 CFR 800.302.
36 There are other statutes that do use numerical benchmarks. According to section 13(d) of the Securities Exchange
Act of 1934 (15 U.S.C. Section 78m(d) any person who acquires 5% or more of the publicly traded securities of a U.S.
firm must report the acquisition of the shares to the Securities and Exchange Commission. For statistical purposes, the
United States defines foreign direct investment as the ownership or control, directly or indirectly, by one foreign person
(individual, branch, partnership, association, government, etc.) of 10% or more of the voting securities of an
incorporated U.S. business enterprise or an equivalent interest in an unincorporated U.S. business enterprise 15 CFR
§806.15 (a)(1). This level of ownership requires foreign owners to file quarterly and longer annual reports with the
Department of Commerce as part of the quarterly and annual reports on the balance of payments and gross domestic
product (GDP).
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(4) Major expenditures or investments, issuances of equity or debt, or dividend payments by
this entity, or approval of the operating budget of the entity;
(5) The selection of new business lines or ventures that the entity will pursue;
(6) The entry into termination or non-fulfillment by the entity of significant contracts;
(7) The policies or procedures of the entity governing the treatment of non-public technical,
financial, or other proprietary information of the entity;
(8) The appointment or dismissal of officers or senior managers;
(9) The appointment or dismissal of employees with access to sensitive technology or
classified U.S. Government information; or
(10) The amendment of the Articles of Incorporation, constituent agreement, or other
organizational documents of the entity with respect to the matters described at paragraph (a)
(1) through (9) of this section.
The Treasury Department’s regulations also provide some guidance to firms that are deciding
whether they should notify CFIUS of a proposed or pending merger, acquisition, or takeover. The
guidance states that proposed acquisitions that need to notify CFIUS are those that involve
“products or key technologies essential to the U.S. defense industrial base.” This notice is not
intended for firms that produce goods or services with no special relation to national security,
especially toys and games, food products, hotels and restaurants, or legal services. CFIUS has
indicated that in order to assure an unimpeded inflow of foreign investment it would implement
the statute “only insofar as necessary to protect the national security,” and “in a manner fully
consistent with the international obligations of the United States.”37
Neither Congress nor the Administration has attempted to define the term national security.
Treasury Department officials have indicated, however, that during a review or investigation each
CFIUS member is expected to apply that definition of national security that is consistent with the
representative agency’s specific legislative mandate.38 The concept of national security was
broadened by P.L. 110-49 to include, “those issues relating to ‘homeland security,’ including its
application to critical infrastructure.”
Procedures
According to the amended Exon-Florio provision, the President or any member of CFIUS can
initiate a review of an investment transaction in addition to a review that is initiated by the parties
to a transaction providing a formal notification. As amended, CFIUS has 30 days to review a
transaction to decide after it receives the initial formal notification by the parties to a merger,
acquisition, or a takeover, whether to investigate a case as a result of its determination that the
investment “threatens to impair the national security of the United States.” National security also
includes “those issues relating to ‘homeland security,’ including its application to critical
infrastructure,” and “critical technologies.” In addition, CFIUS is required to conduct an
investigation of a transaction if the Committee determines that the transaction would result in
37 Ibid.
38 Senate Armed Services Committee, Briefing on the Dubai Ports World Ports Deal, February 23, 2006.
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foreign control of any person engaged in interstate commerce in the United States. During such a
review, the members of CFIUS are also required to consider the 12 factors that Congress has
authored as a basis for assessing the impact of the investment. If during this 30-day period all of
the members of CFIUS conclude that the investment does not threaten to impair the national
security, the review is terminated. If, however, at least one member of the Committee determines
that the investment does threaten to impair the national security CFIUS can proceed to a 45-day
investigation.
During the 30-day review stage, the Director of National Intelligence, although not a member of
CFIUS, is required to carry out a thorough analysis of “any threat to the national security of the
United States” of any merger, acquisition, or takeover. This analysis is required to be completed
“within 20 days” of the receipt of a notification by CFIUS, but the statute directs that the DNI
must be given “adequate time,” presumably if this national security review cannot be completed
within the 20-day requirement This analysis would include a request for information from the
Department of the Treasury’s Director of the Office of Foreign Assets Control and the Director of
the Financial Crimes Enforcement Network. In addition, the Director of National Intelligence is
required to seek and to incorporate the views of “all affected or appropriate” intelligence
agencies.
CFIUS is also required to review “covered” investment transactions in which the foreign entity is
owned or controlled by a foreign government, but the law provides an exception to this
requirement. A review is exempted if the Secretary of the Treasury and certain other specified
officials determine that the transaction in question will not impair the national security. It is
somewhat unclear, however, how this requirement will mesh with the established process. The
measure does not amend or alter the current statute in the area that has been the source of
differences between CFIUS and Congress.
Presidential Authority
As previously indicated, P.L. 110-49 grants the President the authority to block proposed or
pending foreign “mergers, acquisitions, or takeovers” of “persons engaged in interstate commerce
in the United States” that threaten to impair the national security. Congress directed that before
this authority can be invoked the President must conclude that (1) other U.S. laws are inadequate
or inappropriate to protect the national security; and (2) that he must have “credible evidence”
that the foreign investment will impair the national security. As a result, if CFIUS determines, as
was the case in the Dubai Ports transaction, that it does not have credible evidence that an
investment will impair the national security, then it argues that it is not required to undertake a
full 45-day investigation, even if the foreign entity is owned or controlled by a foreign
government. After considering the two conditions listed above (other laws are inadequate or
inappropriate, and he has credible evidence that a foreign transaction will impair national
security), the President is granted almost unlimited authority to take “such action for such time as
the President considers appropriate to suspend or prohibit any covered transaction that threatens
to impair the national security of the United States.” In addition, such determinations by the
President are not subject to judicial review, as was emphasized in the ruling by the U.S. District
Court for the District of Columbia in the case of Ralls vs. the Committee on Foreign Investment
in the United States.
In addition, the President, acting through CFIUS, is required to conduct a National Security
investigation and to take any “necessary” actions as part of the 45-day investigation if the review
indicates that at least one of three conditions exists. These three conditions are (1) as a result of a
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review of the transaction, CFIUS determines that the transactions threaten to impair the national
security of the United States and that the threat had not been mitigated during or prior to a review
of the transaction; (2) the foreign person is controlled by a foreign government; or (3) the
transactions would result in the control of any critical infrastructure by a foreign person, the
transactions could impair the national security, and that such impairment had not been mitigated.
At the conclusion of the investigation or the 45-day review period, whichever comes first, the
Committee can decide to offer no recommendation or it can recommend that the President
suspend or prohibit the investment. The President is under no obligation to follow the
recommendation of the Committee to suspend or prohibit an investment.
During a review or an investigation, CFIUS and a designated lead agency have the authority to
negotiate, impose, or enforce any agreement or condition with the parties to a transaction in order
to mitigate any threat to the national security of the United States. Such agreements are to be
based on a “risk-based analysis” of the threat posed by the transaction. Also, if a notification of a
transaction is withdrawn before any review or investigation by CFIUS can be completed, the
amended law grants the Committee the authority to take a number of actions. In particular, the
Committee could develop (1) interim protections to address specific concerns about the
transaction pending a re-submission of a notice by the parties; (2) specific time frames for resubmitting
the notice; and (3) a process for tracking any actions taken by any parties to the
transaction.
Factors for Consideration
The Exon-Florio provision includes a list of 12 factors the President must consider in deciding to
block a foreign acquisition. These factors are also considered by the individual members of
CFIUS as part of their own review process to determine if a particular transaction threatens to
impair the national security. This list includes the following elements:
(1) domestic production needed for projected national defense requirements;
(2) the capability and capacity of domestic industries to meet national defense requirements,
including the availability of human resources, products, technology, materials, and other
supplies and services;
(3) the control of domestic industries and commercial activity by foreign citizens as it affects
the capability and capacity of the U.S. to meet the requirements of national security;
(4) the potential effects of the transactions on the sales of military goods, equipment, or
technology to a country that supports terrorism or proliferates missile technology or chemical
and biological weapons; and transactions identified by the Secretary of Defense as “posing a
regional military threat” to the interests of the United States;
(5) the potential effects of the transaction on U.S. technological leadership in areas affecting
U.S. national security;
(6) whether the transaction has a security-related impact on critical infrastructure in the
United States:
(7) the potential effects on United States critical infrastructure, including major energy
assets;
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(8) the potential effects on United States critical technologies;
(9) whether the transaction is a foreign government-controlled transaction;
(10) in those cases involving a government-controlled transaction, a review of (A) the
adherence of the foreign country to nonproliferation control regimes, (B) the foreign
country’s record on cooperating in counter-terrorism efforts, (C) the potential for
transshipment or diversion of technologies with military applications,;
(11) the long-term projection of the United States requirements for sources of energy and
other critical resources and materials; and
(12) such other factors as the President or the Committee determine to be appropriate.39
Factors 6-12 that were added through P.L. 110-49 potentially broaden significantly the scope of
CFIUS’s reviews and investigations. Previously, CFIUS had been directed by Treasury
Department regulations to focus its activities primarily on investments that had an impact on U.S.
national defense security. The additional factors, however, incorporate economic considerations
into the Exon-Florio process in a way that was specifically rejected when the measure initially
was adopted and refocuses CFIUS’s reviews and investigations to consider the broader rubric of
economic security. In particular, CFIUS is now required to consider the impact of an investment
on critical infrastructure as a factor for considering recommending that the President block or
postpone a transaction. Critical infrastructure is defined in broad terms within the measure as
“any systems and assets, whether physical or cyber-based, so vital to the United States that the
degradation or destruction of such systems or assets would have a debilitating impact on national
security, including national economic security and national public health or safety.”
As originally drafted, the Exon-Florio provision also would have applied to joint ventures and
licensing agreements in addition to mergers, acquisitions, and takeovers. Joint ventures and
licensing agreements subsequently were dropped from the proposal because the Reagan
Administration and various industry groups argued at the time that such business practices were
deemed to be beneficial arrangements for U.S. companies. In addition, they argued that any
potential threat to national security could be addressed by the Export Administration Act40 and the
Arms Control Export Act.41
Confidentiality Requirements
The Exon-Florio provision also codified confidentiality requirements that are similar to those that
appeared in Executive Order 11858 by stating that any information or documentary material filed
under the provision may not be made public “except as may be relevant to any administrative or
judicial action or proceeding.”42 The provision does state, however, that this confidentiality
provision “shall not be construed to prevent disclosure to either House of Congress or to any duly
authorized committee or subcommittee of the Congress.” The provision provides for the release
of proprietary information “which can be associated with a particular party” to committees only
39 The last requirement under factor 4 and factors 6-12 were added by P.L. 110-49.
40 50 U.S.C. App. Section 2401, as amended.
41 22 U.S.C. App. 2778 et seq.
42 50 U.S.C. Appendix Section 2170(c)
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with assurances that the information will remain confidential. Members of Congress and their
staff members will be accountable under current provisions of law governing the release of
certain types of information. The Exon-Florio provision requires the President to provide a
written report to the Secretary of the Senate and the Clerk of the House detailing his decision and
his actions relevant to any transaction that was subject to a 45-day investigation.43
Mitigation and Tracking
Since the implementation of the Exon-Florio provision in the 1980s, CFIUS had developed
several informal practices that likely were not envisioned when the statute was drafted. In
particular, members of CFIUS on occasion had negotiated conditions with firms to mitigate or to
remove business arrangement that raised national security concerns among the members of
CFIUS. Such agreements often were informal arrangements that had an uncertain basis in statute
and had not been tested in court. These arrangements often were negotiated during the formal 30-
day review period, or even during an informal process prior to the formal filing of a notice of an
investment transaction.
According to P.L. 110-49, CFIUS must designate a lead agency to negotiate, modify, monitor,
and enforce agreements in order to mitigate any threat to national security. Such agreements are
required to be based on a “risk-based analysis” of the threat posed by the transaction. CFIUS is
also required to develop a method for evaluating the compliance of firms that have entered into a
mitigation agreement or condition that was imposed as a requirement for approval of the
investment transaction. Such measures, however, are required to be developed in such a way that
they allow CFIUS to determine that compliance is taking place without also (1) “unnecessarily
diverting” CFIUS resources from assessing any new covered transaction for which a written
notice had been filed; and (2) placing “unnecessary” burdens on a party to a investment
transaction.
On February 20, 2008, Bain Capital and Huawei Technologies withdrew their offer to acquire the
network and software firm 3Com for $2.2 billion, due to an inability to successfully negotiate a
mitigation agreement with members of CFIUS. Bain Capital is a privately held asset management
and investment firm, and Huawei Technologies is the largest networking and telecommunications
equipment supplier in China. 3Com is a publicly held company that specializes in networking
equipment and in the Tipping Point network intrusion prevention software. Such software is used
by various U.S. defense firms to prevent outside groups from accessing their confidential
databases. Bain Capital and Huawei reportedly withdrew their proposal after they failed to agree
to terms with CFIUS over a mitigation agreement and stated that they would restructure the deal
and resubmit it at a later date in 2008.44
If a notification of a transaction is withdrawn before any review or investigation by CFIUS can be
completed, CFIUS can take a number of actions, including (1) interim protections to address
specific concerns about the transaction pending a re-submission of a notice by the parties; (2)
specific time frames for resubmitting the notice; and (3) a process for tracking any actions taken
by any party to the transaction. Also, any federal entity or entities that are involved in any
mitigation agreement are to report to CFIUS if there is any modification that is made to any
43 50 U.S.C. Appendix Section 2170(g).
44 US Insiders Point to Bain Errors Over 3Com, The Financial Times Limited, March 3, 2008.
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agreement or condition that had been imposed and to ensure that “any significant” modification is
reported to the Director of National Intelligence and to any other federal department or agency
that “may have a material interest in such modification.” Such reports are required to be filed
with the Attorney General.
Congressional Oversight
P.L. 110-49 significantly increases the types and number of reports that CFIUS is required to
send to certain specified Members of Congress. In particular, CFIUS is required to brief certain
congressional leaders if they request such a briefing and to report annually to Congress on any
reviews or investigations that it had conducted during the prior year. Each report must include a
list of all reviews and investigations that had been conducted, information on the nature of the
business activities of the parties involved in an investment transaction, information about the
status of the review or investigation, and information on any withdrawal from the process, any
roll call votes by the Committee, any extension of time for any investigation, and any presidential
decision or action taken under the Exon-Florio provision. In addition, CFIUS is required to report
on trend information on the number of filings, investigations, withdrawals, and presidential
decisions or actions that were taken. The report must include cumulative information on the
business sectors involved in filings and the countries from which the investments originated;
information on the status of the investments of companies that withdrew notices and the types of
security arrangements and conditions CFIUS used to mitigate national security concerns; the
methods the Committee used to determine that firms were complying with mitigation agreements
or conditions; and a detailed discussion of all perceived adverse effects of investment transactions
on the national security or critical infrastructure of the United States.
The Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of
Commerce, is required to conduct a study on investment in the United States, particularly in
critical infrastructure and industries affecting national security by (1) foreign governments,
entities controlled by or acting on behalf of a foreign government, or persons of foreign countries
which comply with any boycott of Israel; or (2) foreign governments, entities controlled by or
acting on behalf of a foreign government, or persons of foreign countries which do not ban
organizations designated by the Secretary of State as foreign terrorist organizations. In addition,
CFIUS is required to provide an annual evaluation of any credible evidence of a coordinated
strategy by one or more countries or companies to acquire U.S. companies involved in research,
development, or production of critical technologies in which the United States is a leading
producer. The report must include an evaluation of possible industrial espionage activities
directed or directly assisted by foreign governments against private U.S. companies aimed at
obtaining commercial secrets related to critical technologies.
The Inspector General of the Department of the Treasury is required to investigate any failure of
CFIUS to comply with requirements for reporting that were imposed prior to the passage of P.L.
110-49 and to report the findings of this report to Congress. In particular, the report must be sent
to the chairman and ranking Member of each committee of the House and the Senate with
jurisdiction over any aspect of the report, including the Committee on Foreign Relations, the
Committee on Foreign Affairs, the Committee on Financial Services, and the Committee on
Energy and Commerce of the House.
The chief executive officer of any party to a merger, acquisition, or takeover is required to certify
in writing that the information contained in the written notification to CFIUS fully complies with
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the requirements of the Exon-Florio provision and that the information is accurate and complete.
This written notification would also include any mitigation agreement or condition that was part
of a CFIUS approval.
CFIUS Since Exon-Florio
Recent information indicates that the number of mergers and acquisitions fell in 2008 and 2009,
as indicated in Error! Reference source not found.. Although the number of successful investment
transactions rebounded in 2010 and 2011, they lag behind the large number of transactions that
occurred in 2006 and 2007. The decline in the number of successful mergers and acquisitions in
2008 and 2009 likely resulted from the financial crisis during that period in which access to
capital was sharply curtailed. Based on the number of transactions per year, acquisitions of U.S.
firms by other U.S. firms have accounted for the largest share of all merger and acquisition
(M&A) transactions over the past 15 years. This share fell from 73% of all U.S. M&A
transactions in 2003 to 66% in 2011, down from the 68.5% share recorded in the previous year.
The share of M&A activity attributed to foreign firms acquiring U.S. firms in 2011 accounted for
14.2% of all such transactions, up from 13.7% in the previous year. In addition, U.S. firms
acquiring foreign firms also increased in 2011, accounting for 20% of the total number of
transactions, up from 17.8% recorded in 2010.
Table 1. Merger and Acquisition Activity in the United States, 1996-2011
Total Number of Mergers
and Acquisitions
U.S. Firms
Acquiring U.S.
Firms
Non-U.S. Firms
Acquiring
U.S. Firms
U.S. Firms
Acquiring
Non-U.S. Firms
1996 7,347 5,585 628 1,134
1997 8,479 6,317 775 1,387
1998 10,193 7,575 971 1,647
1999 9,173 6,449 1,148 1,576
2000 8,853 6,032 1,264 1,557
2001 6,296 4,269 923 1,104
2002 5,497 3,989 700 808
2003 5,959 4,357 722 880
2004 7,031 5,084 813 1,134
2005 7,600 5,463 977 1,160
2006 8,621 6,105 1,142 1,374
2007 9,477 6,505 1,408 1,564
2008 7,626 5,172 1,127 1,327
2009 5,862 4,099 815 948
2010 7,309 5,006 1,004 1,299
2011 7,413 4,875 1,055 1,483
Source: Mergers & Acquisitions, February 2012.
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Recent Transactions
According to the annual report filed by CFIUS under the requirements of P.L. 110-49,45 CFIUS
activity dropped sharply in 2009 and 2010 as a result of tight credit markets willing to fund
acquisitions and takeovers during the global financial crisis, but rebounded in 2010, as indicated
in Error! Reference source not found.. During the three-year period 2008-2010, foreign investors
sent 313 notices to CFIUS of plans to acquire, takeover, or merge with a U.S. firm. Of the
investment transactions that were notified, about 10% were withdrawn during the initial 30-day
review; about 30% of the total transactions that were notified were determined to require a 45-day
investigation. Also, of the transactions that were investigated, about 14% were withdrawn before
a final determination could be reached. As a result, of the 313 proposed investment transactions
that were notified to CFIUS, 261 transactions, or 83% of the transactions were completed. The
CFIUS report also indicates that a presidential decision was not made in any of the transactions,
whether because transactions that might have been recommended by CFIUS be blocked by the
President were withdrawn before CFIUS could make its recommendation, or because CFIUS did
not offer a recommendation that a transaction be blocked by the President.
Table 2. Foreign Investment Transactions Reviewed by CFIUS, 2008-2010
Year
Number of
Notices
Notices
Withdrawn
During Review
Number of
Investigations
Notices
Withdrawn
During
Investigation
Presidential
Decisions
2008 155 18 23 5 0
2009 65 5 25 2 0
2010 93 6 35 6 0
Total 313 29 93 13 0
Source: Annual Report to Congress, Committee on Foreign Investment in the United States, December 2011.
The CFIUS report also indicates that three-fourths of the foreign investment transactions that
were notified to CFIUS were in the manufacturing and finance, information, and services sectors,
as indicated in Error! Reference source not found.. Within the manufacturing sector, about half of
all the investment transactions notified to CFIUS were in the computer and electronic products
sectors. The next two sectors with the highest number of transactions was the transportation
equipment sector and the machinery sector. Investment transactions in the services sector
accounted for two-thirds of the total number of investment transactions in the finance,
information, and services category.
45 Annual Report to Congress, Committee on Foreign Investment in the United States, December 2011.
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Table 3. Industry Composition of Foreign Investment Transactions
Reviewed by CFIUS, 2008-2010
Year Manufacturing
Finance,
Information,
and Services
Mining,
Utilities, and
Construction
Wholesale and
Retail Trade Total
2008 72 42 25 16 155
2009 21 22 19 3 65
2010 36 35 13 9 93
Total 129 99 57 28 313
Source: Annual Report to Congress, Committee on Foreign Investment in the United States, December 2011.
Error! Reference source not found. shows foreign investment transactions by the home country of
the foreign investor and the industry composition of the investment transactions. According to
data based on notices provided to CFIUS by foreign investors, British investors were the most
active in acquisitions, takeovers, or mergers during the 2008-2010 period, accounting for nearly
one-third of the total number of transactions. France and Israel join the United Kingdom as the
top three countries of origin for investors providing notifications to CFIUS. In all three countries,
investments were concentrated in the manufacturing and finance, information, and services
sectors. The ranking of countries in Error! Reference source not found. differs in a number of
important ways from data published by the Bureau of Economic Analysis on the cumulative
amount, or the total book value, of foreign direct investment in the United States, which places
the United Kingdom, Japan, Netherlands, Germany, Canada, and Switzerland as the most active
countries of origin for foreign investment in the United States.
Table 4. Country of Foreign Investor and Industry Reviewed by CFIUS, 2008-2010
Country Manufacturing
Finance,
Information,
and Services
Mining,
Utilities, and
Construction
Wholesale
Trade and
Retail Trade Total
United Kingdom 44 37 8 2 91
France 14 4 4 3 25
Israel 13 9 2 24
Canada 3 9 10 2 24
Japan 4 8 6 1 19
China 8 3 4 1 16
Russian Fed. 6 3 2 1 12
Italy 8 2 10
Netherlands 2 4 1 1 8
Sweden 3 5 8
Total 129 99 57 28 313
Source: Annual Report to Congress, Committee on Foreign Investment in the United States, December 2011.
The CFIUS annual report also provides some general information on the total number of cases in
which it applied legally binding mitigation measures. The report did not list any specific cases or
measures, but it did indicate that CFIUS applied mitigation measures to 16 cases in the 2008-
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2010 period. According to CFIUS, in 2010, CFIUS agencies negotiated, and parties adopted,
mitigation measures for nine covered transactions.46 Mitigation measures have included a number
of different approaches, including
• Requiring a subsidiary with sensitive technology or classified contracts have a
separate and independent board of directors composed of U.S. citizens.
• Requiring the board of directors to establish a security committee composed of
independent directors who are U.S. citizens and have independent authority over
security compliance.
• Restricting the type of information that can be provided by the U.S. subsidiary to
the foreign parent and the identity/number of parent company employees who are
allowed access to the information.
• Restricting access by non-U.S. citizens to critical infrastructure.
• Requiring the screening of employees and contractor personnel with access to
critical infrastructure.
• Requiring firms to obtain prior approval of seller contracts for certain goods or
services where the seller is foreign-owned.
• Requiring firms adopt and implement network and IT security policy.
CFIUS also has implemented procedures to evaluate and ensure that parties to a investment
transaction remain in compliance with any risk mitigation measures that were adopted to gain
approval of the investment.
As a consequence of the confidential nature of the CFIUS review of any proposed transaction,
there are few official sources of information other than the congressionally mandated annual
report concerning the Committee’s work. For the most part, information concerning individual
transactions that have been reviewed by CFIUS or any final recommendations that have been
issued by CFIUS have come from announcements released by the companies involved in a
transaction and not by CFIUS. According to one source,47 CFIUS had received more than 1,500
notifications between 1988 and 2006, of which it conducted a full investigation of 25 cases. Of
these 25 cases, 13 transactions were withdrawn upon notice that CFIUS would conduct a full
review and 12 of the remaining transactions cases were sent to the President. Of these 12
transactions, 1 was prohibited.48
Impact of the Exon-Florio Process on CFIUS
The DP World case exposed a number of important aspects of CFIUS’s operations that apparently
were not well known or understood by the public in general. Many of these concerns were
addressed in P.L. 110-49. As already indicated, the Exon-Florio provision stipulates a three-step
process: the formal notification to CFIUS and a 30-day review; a 45-day investigation for those
46 Annual Report to Congress, Committee on Foreign Investment in the United States, December 2011
47 CFIUS, The Washington Post, July 3, 2005. p. F3.
48 Auerbach, Stuart. “President Tells China to Sell Seattle Firm.” The Washington Post, February 3, 1990. p. A1; and
Benham, Barbara. “Blocked Takeover Fuels Foreign Policy Flap.” Investor’s Daily, February 8, 1990. p. 1.
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transactions that raised national security concerns during the 30-day review and for those in
which the concerns were not resolved during the review period; and a 15-day presidential
determination stage for those transactions that were determined after the 45-day review to pose an
impairment to national security. Over time, however, this process apparently evolved to include
an informal fourth stage of unspecified length of time that consists of an unofficial CFIUS
determination prior to the formal filing with CFIUS. This type of informal review developed
because it likely has served the interests of both CFIUS and the firms involved in an investment
transaction. According to Treasury Department officials, this informal contact enables “CFIUS
staff to identify potential issues before the review process formally begins.”49 This informal
process is likely to continue under the provisions of P.L. 110-49. An important difference,
however, is that CFIUS gained legislative authority under P.L. 110-49 to negotiate and enforce
agreements with foreign investors to mitigate the effects of an investment transaction on national
security.
For CFIUS members, the informal process has been beneficial because it has given them as much
time as they have felt was necessary to review a transaction without facing the time constraints
that arise under the formal CFIUS review process. This informal review likely has also given the
CFIUS members added time to negotiate with the firms involved in a transaction to restructure
the transaction in ways that have addressed any potential security concerns or to develop other
types of conditions that members of CFIUS feel are appropriate in order to remove security
concerns.
The DP World acquisition demonstrated how this informal CFIUS process operates in reviewing
a proposed foreign investment transaction. According to officials involved in the review, DP
World officials contacted the Treasury Department in early October 2005 to informally discuss
their proposed transaction. Treasury officials directed DP World to consult with the Department
of Homeland Security and in November the Treasury officials requested an intelligence
assessment from the Director of National Intelligence. Staff representatives from all of the CFIUS
members met on December 6, 2005, to discuss the transaction, apparently to determine if there
were any security concerns that had not been addressed and resolved during the two-month-long
informal review of the proposed transaction.
Ten days after that meeting, DP World filed its official notification with CFIUS, which distributed
the notification to all of the CFIUS members and to the Departments of Energy and
Transportation. During this process, the Department of Homeland Security apparently negotiated
a letter of assurances with DP World that addressed some outstanding concerns about port
security. On the basis of this letter and the lack of any remaining concerns expressed by any
member of CFIUS or other agencies that were consulted, CFIUS completed its review of the
transaction on January 17, 2006, and concluded that the transaction did not threaten to impair the
national security and therefore that it did not warrant a 45-day investigation.50
49 Testimony of Robert Kimmett, Briefing on the Dubai Ports World Deal before the Senate Armed Services
Committee, February 23, 2006.
50 Ibid.
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Conclusions
On July 26, 2007, President Bush signed P.L. 110-49, the Foreign Investment and National
Security Act of 2007. The Treasury Department released its regulations implementing this law on
November 21, 2008, as the global financial crisis was the focus of attention. In 2008, tight credit
conditions associated with the global financial crisis and the slowdown in the rate of growth in
the U.S. economy retarded merger and acquisition activities in the United States and abroad.
There has been no particular foreign acquisition that has provoked a public backlash comparable
to some acquisitions that occurred prior to the financial crisis. On June 20, 2011, the Obama
Administration issued a formal statement on foreign investment declaring the countries’
commitment to an open investment policy.51 Some in Congress and elsewhere are dissatisfied,
however, that the legislation in its present form does not address a broad range of issues
concerning foreign investment. For instance, when the measure was debated and approved, the
extent and nature of sovereign wealth funds (SWFs) in which entities controlled by foreign
governments invest in U.S. firms was relatively unknown. In addition, the sub-prime mortgage
crisis was just emerging and foreign investors had not yet taken substantial stakes in prominent
U.S. financial firms. These investments are challenging some established notions of the role of
foreign investment in the economy and the concept of what role economic issues play within the
rubric of national security.
These and other concerns about foreign investment underscore the significant differences that
remained between Congress and the Bush Administration over the operations of CFIUS and over
the economic and security objectives the Committee should pursue. The proposed acquisition of
P&O by Dubai Ports World sparked a broader set of concerns and a wide-ranging discussion
between Congress and the Bush Administration over a working set of parameters that establishes
a functional definition of the national economic security implications of foreign direct
investment. In part, this issue reflects differing assessments of the economic impact of foreign
investment on the U.S. economy and differing political and philosophical convictions among
Members and between Congress and the Administration.
The incident also focused attention on the informal process firms use to have their investment
transactions reviewed by CFIUS prior to a formal review. According to anecdotal evidence, some
firms apparently believe that the CFIUS process is not market neutral, but that it adds to market
uncertainty that can negatively affect a firm’s stock price and lead to economic behavior by some
firms that is not optimal for the economy as a whole. Such behavior might involve firms
expending a considerable amount of resources to avoid a CFIUS investigation, or deciding to
terminate a transaction that would improve the optimal performance of the economy in order to
avoid a CFIUS investigation. While such anecdotal evidence does not provide enough evidence to
serve as the basis for developing public policy, it does raise a number of concerns about the
possible impact of the CFIUS process on the market and the potential costs of redefining the
concept of national security relative to foreign investment.
The focus by Congress on the Committee has also shown that the DP World transaction, in
combination with other recent unpopular foreign investment transactions, exacerbated
dissatisfaction among some Members of Congress over the operations of CFIUS. In particular,
51 Statement by the President on United States Commitment to Open Investment Policy, the White House, June 20,
2011.
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some Members were displeased with the discretionary authority the Committee used under the
Exon-Florio provision to investigate certain foreign investment transactions. As a result, Congress
changed the process to require more frequent contacts between the Committee, which generally
operates without much public or congressional attention, and Congress. Congress also expanded
its oversight role over the Committee.
The DP World transaction also revealed that the September 11, 2001, terrorist attacks
fundamentally altered the viewpoint of some Members of Congress regarding the role of foreign
investment in the economy and over the impact of such investment on the national security
framework. These observers argued that this change in perspective required a reassessment of the
role of foreign investment in the economy and of the implications of corporate ownership of
activities that fall under the rubric of critical infrastructure. As a result, Congress amended the
CFIUS process to enhance Congress’s oversight role while it reduced somewhat the discretion of
CFIUS to review and investigate foreign investment transactions in order to have CFIUS
investigate a larger number of foreign investment cases. In addition, the DP World transaction
focused attention on long-unresolved issues concerning the role of foreign investment in the
nation’s overall security framework and the methods that are being used to assess the impact of
foreign investment on the nation’s defense industrial base, critical infrastructure, and homeland
security.
In 2012, the growing number of investments by Chinese firms sparked concerns by a number of
groups over the economic and security impact of the investments, similar to concerns about
Japanese investment in the United States in the 1980s. In particular, on October 8, 2012, the
House Permanent Select Committee on Intelligence published a report52 on the “the
counterintelligence and security threat posed by Chinese telecommunications companies doing
business in the United States.” The report offered a number of policy recommendations affecting
CFIUS, including
• The Committee on Foreign Investment in the United States (CFIUS) must block
acquisitions, takeovers, or mergers involving Huawei and ZTE given the threat to
U.S. national security interests. Legislative proposals seeking to expand CFIUS
to include purchasing agreements should receive thorough consideration by
relevant Congressional committees.
• Committees of jurisdiction in the U.S. Congress should consider potential
legislation to better address the risk posed by telecommunications companies
with nation-state ties or otherwise not clearly trusted to build critical
infrastructure. Such legislation could include increasing information sharing
among private sector entities, and an expanded role for the CFIUS process to
include purchasing agreements.
In addition, in November 2012, the U.S.-China Economic and Security Review Commission53
issued a report that detailed concerns over Chinese investments by U.S. industries, lawmakers,
and government officials about the ‘‘potential economic distortions and national security concerns
52 Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei
and ZTE: A Report by Chairman Mike Rogers and Ranking Member C.A. Dutch Ruppersberger of the Permanent
Select Committee on Intelligence, U.S. House of Representatives, October 8, 2012.
53 2012 Report to Congress of the U.S.-China Economic and Security Review Commission, U.S. China Economic and
Security Review Commission, November 2012.
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arising from China’s system of state-supported and state-led economic growth.” In particular,
some observers argued that economic concerns focused on the possibility that state-backed
Chinese companies choose to invest ‘‘based on strategic rather than market-based
considerations,’’ and are free from the constraints of market forces because of generous state
subsidies. The report proffered a number of recommendations for amending the CFIUS statute:
• Congress examine foreign direct investment from China to the United States and
assess whether there is a need to amend the underlying statute (50 U.S.C. app
2170) for the Committee on Foreign Investment in the United States (CFIUS) to
(1) require a mandatory review of all controlling transactions by Chinese stateowned
and state-controlled companies investing in the United States; (2) add a
net economic benefit test to the existing national security test that CFIUS
administers; and (3) prohibit investment in a U.S. industry by a foreign company
whose government prohibits foreign investment in that same industry.
• Legislation creating the Committee on Foreign Investment in the United States
(CFIUS) could be amended to add a test of ‘‘economic benefit’’ of a Chinese
investment in the United States.
• CFIUS’s jurisdiction be extended to include ‘‘greenfield’’ investments, or
investments in new industrial plants and facilities.
Most economists agree that there is little economic evidence to conclude that foreign ownership,
whether by a private entity or by an entity that is owned or controlled by a foreign government,
has a measurable impact on the U.S. economy. Others may argue that such firms pose a risk to
national security or to homeland security, but such concerns are not within the purview of this
report. Similar issues concerning corporate ownership were raised during the late 1980s and early
1990s when foreign investment in the U.S. economy increased rapidly. There are little new data,
however, to alter the conclusion reached at that time that there is no definitive way to assess the
economic impact of foreign ownership or of foreign investment on the economy. Although some
observers have expressed concerns about foreign investors who are owned or controlled by
foreign governments acquiring U.S. firms, there is little confirmed evidence that such a
distinction in corporate ownership has any effect on the economy as whole.
For most economists, the distinction between domestic- and foreign-owned firms, whether the
foreign firms are privately owned or controlled by a foreign government, is sufficiently small that
they would argue that it does not warrant placing restrictions on the inflow of foreign investment.
Nevertheless, foreign direct investment does entail various economic costs and benefits. On the
benefit side, such investments bring added capital into the economy and potentially could add to
productivity growth and innovation. Such investment also represents one repercussion of the U.S.
trade deficit. The deficit transfers dollar-denominated assets to foreign investors, who then decide
how to hold those assets by choosing among various investment vehicles, including direct
investment. Foreign investment also removes a stream of monetary benefits from the economy in
the form of repatriated capital and profits that reduces the total amount of capital in the economy.
Such costs and benefits likely occur whether the foreign owner is a private entity or a foreign
government.
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