Foreign Investment: Laws and Policies Regulating Foreign	 
Investment in 10 Countries (28-FEB-08, GAO-08-320).		 
                                                                 
Foreign acquisitions of U.S. companies can pose a significant	 
challenge for the U.S. government because of the need to balance 
the benefits of foreign investment with national security	 
concerns. The Exon-Florio amendment to the Defense Production Act
authorizes the President to suspend or prohibit foreign 	 
acquisitions of U.S. companies that may harm national security.  
To better understand how other countries deal with similar	 
challenges, GAO was asked to identify how other countries address
the issues that Exon-Florio is intended to address. Specifically,
this report describes selected countries' (1) laws and policies  
enacted to regulate foreign investment to protect their national 
security interests and (2) implementation of those laws and	 
policies. This report updates a 1996 GAO report that describes	 
how four major foreign investors in the United States--France,	 
Germany, Japan, and the United Kingdom--monitored foreign	 
investment in their own countries to protect national security	 
interests. It also examines foreign investment in six additional 
countries: Canada, China, India, the Netherlands, Russia, and the
United Arab Emirates (UAE). GAO reviewed selected laws and	 
regulations and interviewed foreign government officials and	 
others concerning their implementation and any planned changes to
their foreign investment laws, regulations, and policies.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-320 					        
    ACCNO:   A81176						        
  TITLE:     Foreign Investment: Laws and Policies Regulating Foreign 
Investment in 10 Countries					 
     DATE:   02/28/2008 
  SUBJECT:   Federal law					 
	     Foreign governments				 
	     Foreign investments in US				 
	     Foreign policies					 
	     Foreign trade agreements				 
	     Foreign trade policies				 
	     Homeland security					 
	     International relations				 
	     International trade				 
	     International trade regulation			 
	     Policy evaluation					 

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GAO-08-320

   

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Report to the Honorable Richard Shelby, Ranking Member, Committee on 
Banking, Housing, and Urban Affairs, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

February 2008: 

Foreign Investment: 

Laws and Policies Regulating Foreign Investment in 10 Countries: 

GAO-08-320: 

GAO Highlights: 

Highlights of GAO-08-320, a report to the Honorable Richard Shelby, 
Ranking Member, Committee on Banking, Housing, and Urban Affairs, U.S. 
Senate. 

Why GAO Did This Study: 

Foreign acquisitions of U.S. companies can pose a significant challenge 
for the U.S. government because of the need to balance the benefits of 
foreign investment with national security concerns. The Exon-Florio 
amendment to the Defense Production Act authorizes the President to 
suspend or prohibit foreign acquisitions of U.S. companies that may 
harm national security. 

To better understand how other countries deal with similar challenges, 
GAO was asked to identify how other countries address the issues that 
Exon-Florio is intended to address. Specifically, this report describes 
selected countriesï¿½ (1) laws and policies enacted to regulate foreign 
investment to protect their national security interests and (2) 
implementation of those laws and policies. 

This report updates a 1996 GAO report that describes how four major 
foreign investors in the United Statesï¿½France, Germany, Japan, and the 
United Kingdomï¿½monitored foreign investment in their own countries to 
protect national security interests. It also examines foreign 
investment in six additional countries: Canada, China, India, the 
Netherlands, Russia, and the United Arab Emirates (UAE). GAO reviewed 
selected laws and regulations and interviewed foreign government 
officials and others concerning their implementation and any planned 
changes to their foreign investment laws, regulations, and policies. 

What GAO Found: 

As is the case in the United States, the countries we reviewed have 
enacted laws and instituted policies regulating foreign investment, 
often to address national security concerns. However, each of the 10 
countries has its own concept of national security that influences 
which particular investments may be restricted. As a result of the 
differing concepts, restrictions range from requiring approval of 
investments in a narrowly defined defense sector to broad restrictions 
on the basis of economic security and cultural policy. In addition, 
some countries have recently made changes to their laws and policies to 
more explicitly identify national security as an area of concern, in 
some cases as the result of controversial investments. Several 
countries have also introduced lists of strategic sectors in which 
foreign investment requires government review and approval. 

While there are many unique characteristics of the systems employed by 
the 10 countries to regulate foreign investment, in many ways the 
systems are similar to each other, and to the U.S. process under Exon-
Florio. Eight countries use a formal review processï¿½usually conducted 
by a government economic body with input from government security 
bodiesï¿½to review a transaction. Generally, national security is a 
primary factor or one of several factors considered in evaluating 
transactions. While the concepts of national security vary from country 
to country, all countries share concerns about a core set of issues. 
These include, for example, the defense industrial base, and more 
recently, investment in the energy sector and investment by state-owned 
enterprises and sovereign wealth funds. Most countries have established 
time frames for the review and can place conditions on transactions 
prior to approval. For example, a country may place national 
citizenship requirements on company board members. 

However, unlike the voluntary notification under Exon-Florio, most 
countriesï¿½ reviews are mandatory if the investment reaches certain 
dollar thresholds or if the buyer will obtain a controlling or blocking 
share in the acquired company. Further, unlike the United States, five 
countries allow decisions to be appealed through administrative means 
or in court. 

Two countries do not have a formal review process. The Netherlands 
restricts entry into certain sectors such as public utilities, and the 
UAE restricts the extent of ownership allowed in all sectors without a 
review. In addition to the formal mechanisms, there are unofficial 
factors that may influence investment in each of the 10 countries. For 
example, in some countries an informal government preapproval for 
sensitive transactions may be needed. 

In commenting on a draft of this report, the Department of the Treasury 
emphasized the United Statesï¿½ commitment to an open investment policy. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-320]. For more information, contact Ann 
Calvaresi-Barr at (202) 512-4841 or [email protected]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

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

Foreign Investment Review Implementation Has Many Similarities in 
Different Countries: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Department of Treasury: 

Appendix III: Highlights of Recent Changes to Exon-Florio: 

Appendix IV: Canada: 

Appendix V: China: 

Appendix VI: France: 

Appendix VII: Germany: 

Appendix VIII: India: 

Appendix IX: Japan: 

Appendix X: The Netherlands: 

Appendix XI: Russia: 

Appendix XII: United Arab Emirates: 

Appendix XIII: United Kingdom: 

Appendix XIV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Selected Laws and Regulations Addressing Foreign Investment 
Restrictions: 

Table 2: Legal Systems of Selected Countries: 

Table 3: Common Elements: 

Table 4: Changes in CFIUS Membership: 

Figures: 

Figure 1: U.S. and Worldwide Foreign Direct Investment Stocks in the 10 
Selected Countries as of 2006. 

Figure 2: Nominal Foreign Investment Review Process: 

Abbreviations: 

CFIUS: Committee on Foreign Investment in the United States: 

DBERR: Department of Business, Enterprise, and Regulatory Reform: 

DIPP: Department of Industrial Policy and Promotion: 

EC: European Community: 

ECJ: European Court of Justice: 

EU: European Union: 

FAS: Federal Anti-Monopoly Service: 

FDI: foreign direct investment: 

FEFTA: Foreign Exchange and Foreign Trade Act: 

FEMA: Foreign Exchange Management Act: 

FERA: Foreign Exchange Regulation Act: 

FINSA: Foreign Investment and National Security Act: 

FIPB: Foreign Investment Promotion Board: 

FTZ: free trade zone: 

GDP: gross domestic product: 

ICA: Investment Canada Act: 

IMF: International Monetary Fund: 

IPO: initial public offering: 

METI: Ministry for Economy, Trade, and Industry: 

MOFCOM: Ministry of Commerce: 

NAFTA: North American Free Trade Agreement: 

NDRC: National Development and Reform Commission: 

NSEA: National Security Exception Act: 

OECD: Organization for Economic Co-operation and Development: 

OFT: Office of Fair Trading: 

SAIC: State Administration for Industry and Commerce: 

SASC: State-owned Assets Supervision and Administration Commission: 

SOE: state-owned enterprise: 

UAE: United Arab Emirates: 

UK: United Kingdom: 

UNCTAD: United Nations Conference on Trade and Development: 

WTO: World Trade Organization: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

February 28, 2008: 

The Honorable Richard Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

U.S. investment policy is anchored in the belief that global investment 
is beneficial and necessary to bring economic prosperity worldwide. The 
United Nations reported that between 2000 and 2006, annual foreign 
direct investment in the United States averaged $144 billion, which is 
16 percent of the world's total during that period. The Deputy 
Secretary of the Treasury testified in 2005 that there is an inherent 
link between our national security interests and a strong U.S. economy 
that facilitates free and fair trade.[Footnote 1] However, foreign 
acquisitions of U.S. companies can pose a significant challenge for the 
U.S. government because of the need to balance the benefits of foreign 
investment with national security concerns. The Exon-Florio amendment 
to the Defense Production Act authorizes the President to suspend or 
prohibit transactions that could result in foreign control of U.S. 
companies[Footnote 2] if the transaction threatens to impair national 
security.[Footnote 3] The review of individual transactions has been 
delegated to an interagency committee, the Committee on Foreign 
Investment in the United States (CFIUS). In July 2007, the Foreign 
Investment and National Security Act of 2007[Footnote 4] amended Exon- 
Florio to, among other things, expand the factors to be considered in 
deciding what could affect national security and bring greater 
transparency to the CFIUS review process.[Footnote 5] 

To better understand how other countries deal with similar challenges, 
you asked us to identify other countries' approaches for addressing the 
issues that Exon-Florio is intended to address. Specifically, this 
report describes selected countries' (1) laws and policies enacted to 
regulate foreign investment to protect their national security 
interests and (2) implementation of those laws and policies. 

The Government Accountability Office has reported on the implementation 
of Exon-Florio dating back to the 1990s.[Footnote 6] In addition, in 
1996 we issued a report that describes how four major investors in the 
United States---France, Germany, Japan, and the United Kingdom---- 
monitored foreign investment in their own countries to protect national 
security-related interests.[Footnote 7] This report updates the 1996 
report and also expands it by describing foreign direct investment 
policies and processes in six additional countries: Canada, China, 
India, the Netherlands, Russia, and the United Arab Emirates (UAE). 
Appendixes IV-XIII contain country-specific information for each of the 
10 countries. Our selection of the countries was based on a number of 
factors: We chose countries with which the United States has a large 
reciprocal investment relationship, countries with diverse investment 
controls, countries chosen for regional diversity, and those selected 
in prior GAO work. We obtained and reviewed copies of relevant laws and 
regulations and interviewed foreign government officials concerning 
their implementation and any planned changes to their foreign 
investment laws, regulations, and policies. The information on foreign 
laws and regulations in this report does not reflect our independent 
legal analysis, but is based on interviews and secondary sources such 
as analysis by foreign law specialists at the U.S. Library of Congress 
and our review of the laws in the original language, or translated 
copies of the various foreign laws obtained from foreign government 
officials, foreign government Web sites, or U.S. State Department 
sources. We also interviewed law firms and companies that had been 
involved in merger and acquisition activities in the countries in our 
sample. For a complete description of our scope and methodology, see 
appendix I. 

We conducted this performance audit from December 2006 to February 2008 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Results in Brief: 

As is the case in the United States, the countries we reviewed have 
enacted laws and instituted policies regulating foreign investment, 
often to address national security concerns. However, each of the 10 
countries has its own concept of national security that influences 
which particular investments may be restricted. As a result of the 
differing concepts, restrictions range from requiring approval of 
investments in a narrowly defined defense sector to broad restrictions 
on the basis of economic security and cultural policy. In addition, 
some countries have recently made changes to their laws and policies to 
more explicitly emphasize national security concerns, in some cases as 
the result of controversial investments. Several countries have also 
introduced lists of strategic sectors in which foreign investment 
requires government review and approval. 

While there are many unique characteristics of the systems employed by 
the 10 countries to regulate foreign investment, in many ways the 
systems are similar to each other, and in several ways similar to the 
U.S. process under Exon-Florio. Eight countries use a formal review 
process--usually conducted by a government economic body with input 
from government security bodies--to review a transaction. Generally, 
national security is a primary factor or one of several factors 
considered in evaluating transactions. While the concepts of national 
security vary from country to country, all countries share concerns 
about a core set of national security issues. These include, for 
example, the defense industrial base, and more recently, investment in 
the energy sector and investment by state-owned enterprises and 
sovereign wealth funds.[Footnote 8] Most countries have established 
time frames for the review and can place conditions on selected 
transactions prior to approval. For example, a country may place 
national citizenship requirements on company board members. However, 
unlike the voluntary notification under Exon-Florio, most countries' 
reviews are mandatory if the investment reaches certain dollar 
thresholds or if the buyer will obtain a controlling or blocking share 
in the acquired company. Further, unlike in the U.S. process, five 
countries allow decisions to be appealed in court or through 
administrative means. Two countries do not have a formal review 
process. The Netherlands restricts entry into certain sectors such as 
public utilities, and the UAE restricts the extent of ownership allowed 
in all sectors without a review. In addition to the formal mechanisms, 
there are unofficial factors that may influence investment in each of 
the 10 countries. For example, in some countries it may be necessary to 
obtain an informal government preapproval for sensitive transactions. 

The Department of the Treasury (Treasury) provided written comments on 
a draft of this report. Treasury emphasized the commitment of the 
United States to an open investment policy and stated that countries' 
general investment policies and the relationship of foreign investment 
reviews to those policies are important in understanding investment 
review regimes. Agency comments are included in their entirety in 
appendix II of this report. 

Background: 

The United States is the main source of foreign direct investment and 
also the leading host country for foreign direct investment 
(FDI).[Footnote 9] The top three destinations for U.S. foreign direct 
investment, cumulatively as of 2006, were the United Kingdom, Canada, 
and the Netherlands. The top three foreign direct investors into the 
United States, cumulatively as of 2006, were the United Kingdom, Japan, 
and Germany. Figure 1 shows the amount of foreign direct investment 
from the United States into the countries we reviewed and the amount of 
worldwide investment into these countries, cumulatively as of 2006. 

Figure 1: U.S. and Worldwide Foreign Direct Investment Stocks in the 10 
Selected Countries as of 2006 (US dollars in billions): 

[See PDF for image] 

This figure is a stacked horizontal bar graph depicting U.S. and 
Worldwide Foreign Direct Investment Stocks in the 10 Selected Countries 
as of 2006. The vertical axis of the graph represents ten counties. The 
horizontal axis of the graph represents billions of U.S. dollars from 0 
to 1,200. The following approximated values are depicted: 

Country: United Kingdom; 
U.S. investment: approximately $375; 
Worldwide investment: approximately $775; 
Total: approximately $1,150. 

Country: France; 
U.S. investment: approximately $75; 
Worldwide investment: approximately $705; 
Total: approximately $780. 

Country: Germany; 
U.S. investment: approximately $100; 
Worldwide investment: approximately $400; 
Total: approximately $500. 

Country: Netherlands; 
U.S. investment: approximately $200; 
Worldwide investment: approximately $230; 
Total: approximately $430. 

Country: Canada; 
U.S. investment: approximately $230; 
Worldwide investment: approximately $150; 
Total: approximately $380. 

Country: China; 
U.S. investment: approximately $20; 
Worldwide investment: approximately $260. 
Total: approximately $280. 

Country: Russia; 
U.S. investment: approximately $10; 
Worldwide investment: approximately $190; 
Total: approximately $200. 

Country: Japan; 
U.S. investment: approximately $90; 
Worldwide investment: approximately $10; 
Total: approximately $100. 

Country: India; 
U.S. investment: approximately $8; 
Worldwide investment: approximately $42; 
Total: approximately $50; 

Country: United Arab Emirates; 
U.S. investment: approximately $5; 
Worldwide investment: approximately $35; 
Total: approximately $40. 

Source: U.S. Department of Commerce, Bureau of Economic Analysis (U.S. 
investment); and United Nations Conference on Trade and Development 
(worldwide investment). 

[End of figure] 

Foreign direct investment is defined as the purchase of real assets 
abroad for the purpose of acquiring a lasting interest in an enterprise 
and exerting a degree of influence on that enterprise's 
operations.[Footnote 10] There are several different kinds of foreign 
direct investment, including the following: 

Greenfield investments: A greenfield investment is the investment in a 
physical structure in an area where no corporate facilities previously 
existed. It normally entails complete ownership and therefore full 
control over management. 

Strategic partnerships: A strategic partnership is a formal alliance 
(joint venture, licensing agreement, distributorship, or agency 
contract) between two commercial enterprises, usually formalized by one 
or more business contracts, where they mutually participate in certain 
activities (advertising, branding, product development, etc.) 

Mergers and acquisitions: A merger is a business event wherein two or 
more companies decide to pool their assets to form a single new 
company. In the course of this transaction, one of the previously 
existing companies ceases to exist. An acquisition does not necessarily 
constitute a merger if the preexisting companies continue to exist. 
Both of these business transactions can result in a foreign entity 
gaining a portion of a domestic entity. 

The Committee on Foreign Investment in the United States: 

The Exon-Florio amendment authorizes the President to suspend or 
prohibit foreign acquisitions of U.S. companies if they are determined 
to pose a threat to national security. The President delegated the 
authority to investigate individual transactions to an interagency 
committee, the Committee on Foreign Investment in the United 
States.[Footnote 11] While application to CFIUS for review is 
voluntary, firms subject to an Exon-Florio review that do not notify 
CFIUS remain indefinitely subject to Exon-Florio and appropriate 
actions by the President. However, Exon-Florio applies only when a 
transaction is related to national security, which is the case in a 
small percentage of the overall number of foreign direct investments in 
the United States. According to the Treasury Department, historically 
less than 10 percent of foreign direct investments in U.S. companies 
were reviewed by CFIUS. For example, in 2006, there were approximately 
1,730 transactions of foreign companies acquiring U.S. companies. In 
the same year, CFIUS received 113 notices, or 6.5 percent of the total 
transactions for 2006. Seven of those notices proceeded to a 45-day 
investigation and none of them were prohibited. In 2007, CFIUS received 
147 notices. Of these 147 notices, 6 proceeded to a 45-day 
investigation and none were prohibited.[Footnote 12] 

Particular transactions may be approved by CFIUS without conditions, or 
may be approved on the condition that the investor adheres to certain 
mitigation agreements. The President can, based on the advice of the 
committee, exercise his authority under the Exon-Florio provision to 
suspend or prohibit a foreign acquisition of a U.S. company only if he 
finds that there is credible evidence that the foreign entity 
exercising control might take action that threatens national security, 
and that laws, other than Exon-Florio and the International Emergency 
Economic Powers Act, do not provide adequate and appropriate authority 
to protect national security.[Footnote 13] On July 26, 2007, the 
Foreign Investment and National Security Act of 2007 was passed, 
amending Exon-Florio. The act addressed some of the issues related to 
the protection of national security interests. See appendix III for a 
summary of the changes. 

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

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

Various Legal Means Exist to Regulate Foreign Direct Investment: 

Similar to the United States, the countries we studied generally have 
laws and regulations that restrict foreign investment based on national 
security, though the scope of that authority varies significantly. See 
table 1 for the relevant laws by country and the stated reasons for the 
restrictions. 

Table 1: Selected Laws and Regulations Addressing Foreign Investment 
Restrictions: 

Country: Canada; 
Laws and regulations: Investment Canada Act, 1985; 
Reasons for review or restrictions: To ensure net benefit to Canada. 

Country: China; 
Laws and regulations: 2006 Regulations for Mergers and Acquisitions of 
Domestic Enterprises by Foreign Investors, Catalog for the Guidance of 
Foreign Investment Industries; 
Reasons for review or restrictions: National economic security, 
protection of critical industries, purchase of famous trademarks or 
traditional Chinese brands. 

Country: France; 
Laws and regulations: Law 2004-1343, Decree 2005-1739; 
Reasons for review or restrictions: Public order, public safety, 
national defense. 

Country: Germany; 
Laws and regulations: 2004 Amendment to 1961 Foreign Trade and Payments 
Act; 
Reasons for review or restrictions: Ensure essential security 
interests, prevent disturbance of peaceful international coexistence or 
foreign relations. 

Country: India; 
Laws and regulations: Foreign Exchange Management Act, 1999; 
Reasons for review or restrictions: National security and domestic, 
cultural, and economic concerns. 

Country: Japan; 
Laws and regulations: 1991 Amendment to the Foreign Exchange and 
Foreign Trade Act of 1949; 
Reasons for review or restrictions: National security, public order, 
public safety, or the economy. 

Country: The Netherlands; 
Laws and regulations: Financial Supervision Act of 2006; 
Reasons for review or restrictions: Competition, financial market 
oversight. 

Country: Russia; 
Laws and regulations: 1999 Federal Law on Foreign Investments; 
Reasons for review or restrictions: Protection of foundations of the 
constitutional order, national defense and state security, anti-
monopoly. 

Country: United Arab Emirates; 
Laws and regulations: Agencies Law of 1981, Companies Law of 1984; 
Reasons for review or restrictions: Economic and demographic concerns. 

Country: United Kingdom; 
Laws and regulations: Enterprise Act of 2002; 
Reasons for review or restrictions: Public interest, control of 
classified and sensitive technology. 

Country: United States; 
Laws and regulations: Exon-Florio Amendment to the Defense Production 
Act of 1950, as amended; 
Reasons for review or restrictions: National security. 

Source: GAO summary and analysis of laws and information obtained as 
described in our scope and methodology. See appendix I. 

[End of table] 

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

Historical Factors Affect a Country's Receptiveness to Foreign 
Investment: 

The approach to foreign investment that each country in our review has 
taken is based in part on the structure of its legal system, its 
history, and economy. For example, the laws regulating investment in 
countries that operate under a common law system tended to be less 
specific and less detailed than the laws and policies of countries that 
operate under a civil law system. More specifically, in a common law 
system, case law determines the scope and intent of a given law. In 
contrast, civil law systems are, in general, based on a systematic 
codification of the law. In civil law systems, case law formally plays 
a minor role compared to the status of the civil code. Finally, some 
countries' laws do not fit into the single category of civil or common 
law system. Instead, these countries' utilize more than one legal 
system, and therefore can be described as mixed. Table 2 categorizes 
the different legal systems under which the selected countries operate. 

Table 2: Legal Systems of Selected Countries: 

Country: Canada; 
Type of system: Mixed: primarily common law and some civil law. 

Country: China; 
Type of system: Mixed: civil law, communist legal system, and 
traditional Chinese law. 

Country: France; 
Type of system: Civil law. 

Country: Germany; 
Type of system: Civil law. 

Country: India; 
Type of system: Common law. 

Country: Japan; 
Type of system: Civil law. 

Country: The Netherlands; 
Type of system: Civil law. 

Country: Russia; 
Type of system: Civil law. 

Country: United Arab Emirates; 
Type of system: Mixed: Islamic and civil law. 

Country: United Kingdom; 
Type of system: Common law. 

Source: U.S. Library of Congress. 

[End of table] 

In addition to the impact of various legal systems, in the late 20th 
century, several countries began to transition from centrally 
controlled to market-based economies. As this occurred, previously 
state-owned enterprises have been privatized. A country's experience 
with privatization can affect its view of foreign investment. 

Recent Changes More Explicitly Emphasize National Security Concerns: 

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

Canada: 

The Investment Canada Act provides for a transparent foreign investment 
review process.[Footnote 14] All transactions above designated dollar 
thresholds are to be reviewed and approved by either the Minister of 
Industry or the Minister of Canadian Heritage. The act currently does 
not require a review based on national security. Instead, the review 
process considers economic factors and cultural policy objectives. In 
June 2005, the Canadian government introduced a bill to amend the 
foreign investment review process that included provisions to allow the 
government to review foreign investment based on national security 
concerns.[Footnote 15] However, the 38th Parliament was dissolved at 
the end of 2005 to prepare for the 2006 election, and the bill was 
never passed. 

In July 2007, the Canadian government created a Competition Policy 
Review Panel to review key elements of Canada's competition and 
investment policies, including the Investment Canada Act, which will be 
updated as a result of the panel's review. The panel is expected to 
provide its recommendations to the Minister of Industry by the end of 
June 2008. The government of Canada is also examining the need for a 
mechanism to screen foreign investment on the basis of national 
security. 

China: 

The Chinese political-legal system exerts a wide range of controls over 
foreign direct investment and restricts or prohibits foreign investment 
in targeted industries via an ad hoc and opaque system of laws, 
regulations, and policies, according to the U.S. Library of Congress 
and officials familiar with foreign investment in China. In 2005, a 
U.S. private equity firm's attempt to purchase 85 percent ownership of 
a Chinese state-owned company that manufactured construction equipment 
led to a public outcry against foreign acquisitions in China. Beginning 
in 2006, China revised its foreign investment regulations to introduce 
a new "national economic security" screening requirement for cross- 
border mergers and acquisitions. The Chinese government also introduced 
a list of seven specific sectors deemed critical to the national 
economy,[Footnote 16] a new 5-year plan for utilizing foreign 
investment that promised a fundamental shift from "quantity" to 
"quality" in foreign investment, and new provisions on the acquisition 
of domestic enterprises by foreign investors. The new regulations were 
released by six government agencies, led by the Ministry of Commerce. 

France: 

In 2000, the European Court of Justice ruled that France had 
contravened European Community law by prohibiting an investment in 
France. The European Court of Justice ruled that France should clarify 
its investment restrictions. As a result, France enacted Law 2004-1343 
in 2004, reforming the foreign investment review process. An 
accompanying Ministerial Decree, issued in 2005, identifies 11 sectors 
of the economy that require the prior approval of the French Ministry 
of Economy, Finance, and Employment when foreign investors seek to 
obtain a controlling share or a specified portion of a French 
company.[Footnote 17] In October 2006, the European Commission formally 
asked France to amend its regulations. As of February 2008, France has 
made proposals to address the European Commission concerns, and 
discussions are ongoing. 

Germany: 

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

India: 

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

Japan: 

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

Russia: 

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

United Arab Emirates: 

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

The United Kingdom and the Netherlands: 

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

Foreign Investment Review Implementation Has Many Similarities in 
Different Countries: 

While there are many unique characteristics to the systems employed by 
the 10 countries to regulate foreign investment, in many ways the 
systems are similar to each other, and in several ways similar to the 
CFIUS process in the United States. See table 3 for a comparison of 
selected elements of the countries' foreign investment review 
processes. 

Table 3: Common Elements: 

Canada; 
Relevant FDI laws: Investment Canada Act, 1985; 
Formal review: Yes; 
National security review: No; 
Reviewing body: Industry Canada and Canadian Heritage; 
Sectors requiring review: Specified; 
Reasons for review/restrictions: To ensure net benefit to Canada; 
Review time frames: 45 days, with a possible 30-day extension; 
Appeal: No; 
Approval conditions or mitigation agreements: Yes. 

China; 
Relevant FDI laws: 2006 Regulations for Mergers and Acquisitions of 
Domestic Enterprises by Foreign Investors; Catalog for the Guidance of 
Foreign Investment Industries; 
Formal review: Yes; 
National security review: Yes; 
Reviewing body: Ministry of Commerce; 
Sectors requiring review: Specified; 
Reasons for review/restrictions: National economic security, protection 
of critical industries, purchase of famous trademarks or traditional 
Chinese brands; 
Review time frames: Not specified; 
Appeal: No; 
Approval conditions or mitigation agreements: Yes. 

France; 
Relevant FDI laws: Law 2004-1343; Decree 2005-1739; 
Formal review: Yes; 
National security review: Yes; 
Reviewing body: Ministry of Economy, Finance, and Employment; 
Sectors requiring review: Specified; 
Reasons for review/restrictions: Public order, public safety, national 
defense; 
Review time frames: 60 days; 
Appeal: Yes; 
Approval conditions or mitigation agreements: Yes. 

Germany; 
Relevant FDI laws: 2004 Amendment to 1961 Foreign Trade and Payments 
Act; 
Formal review: Yes; 
National security review: Yes; 
Reviewing body: Federal Ministry of Economics and Technology; 
Sectors requiring review: Specified; 
Reasons for review/restrictions: Essential security interests, 
disturbance of peaceful international coexistence, disturbance of 
foreign relations; 
Review time frames: 30 days; 
Appeal: Yes; 
Approval conditions or mitigation agreements: No. 

India; 
Relevant FDI laws: Foreign Exchange Management Act, 1999; 
Formal review: Yes; 
National security review: Yes; 
Reviewing body: Foreign Investment Promotion Board; 
Sectors requiring review: Specified; 
Reasons for review/restrictions: National security, domestic, cultural 
and economic concerns; 
Review time frames: 30 days, in practice 3 months; 
Appeal: Yes; 
Approval conditions or mitigation agreements: No. 

Japan; Relevant FDI laws: 1991 Amendment to the Foreign Exchange and 
Foreign Trade Act of 1949; 
Formal review: Yes; 
National security review: Yes; 
Reviewing body: Ministry of Finance; 
Sectors requiring review: Specified; 
Reasons for review/restrictions: National security, public order, 
public safety, or the economy; 
Review time frames: 30 days; ministries can extend to 5 months; 
Appeal: Yes; 
Approval conditions or mitigation agreements: Yes. 

The Netherlands; 
Relevant FDI laws: Financial Supervision Act of 2006; 
Formal review: No; 
National security review: No; 
Reviewing body: N/A; 
Sectors requiring review: N/A; 
Reasons for review/restrictions: Competition, financial market 
oversight; 
Review time frames: N/A; 
Appeal: N/A; 
Approval conditions or mitigation agreements: N/A. 

Russia; 
Relevant FDI laws: 1999 Federal Law on Foreign Investments; 
Formal review: Yes; 
National security review: Yes; 
Reviewing body: Federal Anti-Monopoly Service; 
Sectors requiring review: Not currently specified; 
Reasons for review/restrictions: Protection of foundations of the 
constitutional order, national defense and state security, anti- 
monopoly; 
Review time frames: 30 days for anti-monopoly review; (No specified 
time frames for national security review); 
Appeal: Yes; 
Approval conditions or mitigation agreements: Yes. 

United Arab Emirates; 
Relevant FDI laws: Agencies Law of 1981; Companies Law of 1984; 
Formal review: No; 
National security review: No; 
Reviewing body: N/A; 
Sectors requiring review: N/A; 
Reasons for review/restrictions: Economic and demographic concerns; 
Review time frames: N/A; 
Appeal: N/A; 
Approval conditions or mitigation agreements: N/A. 

United Kingdom; Relevant FDI laws: Enterprise Act of 2002; 
Formal review: Yes; 
National security review: Yes; 
Reviewing body: Office of Fair Trading; 
Sectors requiring review: Not officially specified; 
Reasons for review/restrictions: Public interest, control of classified 
and sensitive technology; 
Review time frames: 6 months, in practice 30 days; 
Appeal: No; 
Approval conditions or mitigation agreements: Yes. 

United States; 
Relevant FDI laws: Exon-Florio Amendment to the Defense Production Act 
of 1950, as amended; 
Formal review: Yes; 
National security review: Yes; 
Reviewing body: Committee on Foreign Investment in the United States; 
Sectors requiring review: Not officially specified; 
Reasons for review/restrictions: National security; 
Review time frames: 30 days, with a possible 45-day investigation; 
Appeal: No; 
Approval conditions or mitigation agreements: Yes. 

Source: GAO analysis of country data. 

Note: N/A means "not applicable." 

[End of table] 

Eight of the 10 countries use a formal review process to approve or 
deny a transaction. Generally, this review is conducted by a government 
economic body with input from government security bodies, and national 
security is a primary factor or one of several factors considered in 
evaluating transactions. Although the concepts of national security 
vary from country to country, all countries share similar concerns 
about national security-related issues. These concerns include, for 
example, their defense industrial base, and more recently, investments 
in energy sectors and investments of state-owned enterprises and 
sovereign wealth funds; the latter because of concerns that political 
rather than economic motivation may be behind the investment. 

As in the United States, most countries have established time frames 
for the review ranging from 30 days to 6 months, and a majority of the 
governments can require that certain conditions be met prior to 
approving a transaction. For example, a country may place national 
citizenship requirements on company board members. Unlike the U.S. 
system, most countries' reviews are mandatory if the investment reaches 
certain dollar thresholds or if the buyer will obtain a controlling or 
blocking share in the acquired company. Finally, unlike in the U.S. 
process, five countries allow review process decisions to be challenged 
in court or through administrative means. In addition to the formal 
mechanisms, there are unofficial factors that may influence investment 
in each of the 10 countries. For example, in some countries, it may be 
necessary to vet sensitive transactions through a political process 
before the formal legal or administrative process is initiated. 

Most Countries Use a Formal Review Process to Regulate Foreign 
Investment: 

Eight of the 10 countries we examined rely primarily on a review 
process through which the government grants or denies approval for 
transactions, usually above a specified threshold or within specified 
economic sectors. Canada reviews investments above specified monetary 
thresholds to determine if they would provide a net benefit to Canada. 
China maintains a decentralized review process split between central 
and local government authorities and retains the power to restrict or 
block any foreign investment that may have a significant impact on 
national economic security. In France, prior government authorization 
is required for foreign investments in 11 sensitive sectors. Germany 
reviews foreign investments specifically for national security 
purposes, but limits those reviews to investments in the German defense 
industry. Although foreign investment in India is primarily regulated 
through sector-based ownership restrictions, India also uses a review 
process. Japan reviews transactions in sectors potentially affecting 
national security, public order, public safety, and the smooth 
management of the economy. Any foreign investment over 10 percent in a 
company listed on the Japanese stock exchange and any investment in an 
unlisted company that falls into the specified sectors must provide 
prior notification and is reviewed. Investment in all other sectors 
must provide notification after the investment is made, but those 
investments are not reviewed. In Russia the anti-monopoly review has 
been used to review foreign investment transactions for national 
security purposes. The government of the United Kingdom has the 
authority to review and block transactions that may have an adverse 
effect on competition and the public interest. The United Kingdom also 
can intervene when confidential defense-related information is 
involved. This latter intervention is separate from the formal 
competition review. 

Besides a formal review process for foreign investment, every country 
reviewed had companies and sectors that are fully or partially 
government owned or controlled. For example, in India, foreign 
investment in the state-owned atomic energy is prohibited. In the 
Netherlands, as well as other countries, there are restrictions in 
areas such as transportation and public utilities. In the UAE and 
China, there are significant restrictions in a number of areas. 

Some countries have companies that are fully or partially owned or 
controlled by the government that may allow domestic private 
investment, but restrict foreign investment. An example of this type of 
barrier to investment includes golden shares. Golden shares are special 
rights given to governments in private companies. Such rights allow the 
government to maintain a certain degree of control over such companies. 
For example, a government may maintain control over the percentage of 
foreign-owned shares, or approval requirements for the dissolution or 
disposal of any strategic assets. The European Court of Justice ruled 
against governments utilizing golden shares in 2002 and 2003 because 
these shares restrict the free movement of capital within the European 
Union (EU), and determined that the use of golden shares is acceptable 
only in specific circumstances. 

Reviews are Normally Conducted by an Economic Body within the 
Government: 

All 8 of the countries with a review process have formally designated 
an economic-related ministry or body within the government to conduct 
the review. This body generally coordinates as needed with government 
security bodies. For example, similar to several countries we reviewed, 
France's Ministry of Economy, Finance, and Employment is the focal 
point of the review, and this ministry confers with the Ministry of 
Defense and other relevant ministries, depending on the sector of the 
proposed investment. In China, the Ministry of Commerce has primary 
responsibility for reviewing and supervising foreign investment 
transactions. In Japan, foreign investors must provide notification to 
the Ministry of Finance and the ministry with industry area 
jurisdiction. Russia and the United Kingdom both maintain the legal 
process to block investments based on national security concerns. 
Investments that must be reviewed for national security reasons are 
routed through their competition review process. None of the countries 
we studied, however, maintain a formal interagency review committee 
such as CFIUS. 

As is the case in the United States, in other countries, such as 
France, India, and Russia, bureaucratic tension exists between economic 
government bodies and generally more conservative, security-focused 
bodies within the government such as the defense ministry. This natural 
tension serves to balance economic and security concerns both when laws 
and policies are being developed and when decisions are made on 
individual applications in the review process. 

Countries Share Similar Concerns about Foreign Investment: 

Many of the countries have concerns about national security-related 
issues. National security, as viewed by each of the countries, is a 
primary factor to be considered in evaluating transactions in seven of 
the eight countries with a review process. It is Germany's sole factor 
for review of investments. However, there is diversity among the 
countries as to what is considered essential to national interests and 
when it is necessary for the government to protect certain sectors from 
foreign investment or control. This diversity is reflected in each 
country's foreign investment regulatory regime. Factors considered 
during the review of foreign investment in other countries include 
public safety, public order, economic concerns, and cultural policies. 
Some countries do not specifically use the term "national security" in 
their laws, and most countries do not define what is covered under the 
term "national security," or similar terms such as "public interest," 
"public order," or "essential security." 

Most countries have provisions that limit the sale of defense companies 
to foreign investors or provide for a review of those investments. The 
Chinese Catalog for the Guidance of Foreign Investment Industries 
states that foreigners are prohibited from investing in Chinese 
companies that manufacture weapons and ammunition. India requires 
official approval and limits foreign ownership in the defense industry 
to 26 percent. In the UAE, foreign investment in military production is 
clearly, if not explicitly, off limits, according to a UAE official. 
Japan requires prior notification and approval for foreign investment 
in defense-related industries, including companies producing dual use 
items. France and Germany require reviews for foreign investment in 
companies with sensitive or classified technologies or contracts, while 
Russia and the United Kingdom also normally review these investments. 
The other two countries we reviewed are less restrictive. Canada's 
review process does not address foreign investment in the defense 
sector beyond the thresholds for review that apply to all foreign 
investments. The Netherlands has no restrictions on foreign investment 
in the defense industry other than those that are derived from 
international agreements. 

All countries, with the exception of Germany, have specific 
restrictions or review requirements that apply to investments in 
companies involved in the production or distribution of energy. This 
issue of energy security, especially with regard to the foreign 
acquisition of energy infrastructure, has been raised by the European 
Union. For example, in September 2007, the European Commission put 
forth a proposal to establish a European energy policy. One aspect of 
this energy policy proposal would be a prohibition on non-EU companies 
acquiring control of a European Community energy transmission system or 
transmission system operator, unless it is specifically permitted by an 
agreement between the EU and the foreign company. The stated goal of 
this proposal is to promote competition, but the effect would also be 
to block foreign companies, state-owned enterprises, sovereign wealth 
funds, and others from being able to acquire certain energy assets in 
an EU country. 

Some countries review or restrict foreign investment based on economic 
security or cultural nationalism. Canada, China, and Japan formally 
indicate economic reasons as part of the criteria for the review of 
foreign investment. For example, China reviews the acquisition of 
traditional Chinese brands, and Canada restricts foreign investment 
specifically to protect Canada's cultural heritage. The UAE also has in 
place investment restrictions focused on ensuring UAE citizen 
involvement in the country's economy. India maintains restrictions on 
investments in the financial sector, defense industry, real estate, 
infrastructure, telecommunications, print media, and single-brand 
product retail, among other sectors. 

Government officials in six countries have expressed specific concerns 
about investments by foreign state-owned enterprises or sovereign 
wealth funds. Because sovereign wealth funds are government owned, 
there are concerns that they may be guided by political objectives 
rather than profit maximization or that their financial decisions may 
be motivated by support for certain "national champion" companies. A 
sovereign wealth fund is a fund owned by a government and is composed 
of financial assets such as stocks, bonds, property, or other financial 
instruments. Sovereign wealth funds are generally composed of 
government fiscal surpluses, or from official foreign exchange reserves 
at central banks. Because of the unknown potential for sovereign wealth 
funds to be motivated by political instead of economic considerations, 
countries may seek to limit such investments. 

On February 27, 2008, the European Commission released a document 
entitled A Common European Approach to Sovereign Wealth Funds proposing 
that EU leaders endorse a common EU approach to increasing the 
transparency, predictability, and accountability of sovereign wealth 
funds. The International Monetary Fund (IMF) is also developing best 
practices on how to manage sovereign wealth funds.[Footnote 18] 
According to the IMF, sovereign wealth funds have existed since the 
1950s, but their total size worldwide has increased significantly in 
the last 10 to 15 years. The IMF estimates that as of September 2007, 
total holdings of sovereign wealth funds were between $2 trillion and 
$3 trillion, and may reach $10 trillion by 2012.[Footnote 19] 

China, Russia, and the UAE all maintain sovereign wealth funds whose 
worth is estimated in the billions of dollars. Japan has also proposed 
establishing its own sovereign wealth fund, according to a private 
sector representative. In Germany and France, specific concerns have 
been raised about sovereign wealth funds investing in the two 
countries. In a joint letter, the German Chancellor and the French 
President wrote to the current President of the European Union Council 
in September 2007 to request that attention be paid by the European 
Union to the manner in which sovereign wealth funds can distort 
competition, as well as to call for a code of conduct to be developed 
for hedge funds investing in Europe. The letter emphasized that 
financial market transparency and appropriate regulation and 
supervision of investors is necessary to avoid potential negative 
results. Further, the German government is considering whether to 
develop measures to address concerns about the implications of 
sovereign wealth funds acquiring German companies. 

Russian government officials told us that under the July 2007 version 
of the proposed Strategic Sectors Law, state-owned enterprises and 
sovereign wealth funds would require government approval and will not 
be able to obtain a controlling share in certain strategic sectors. The 
U.S. State Department has indicated that in the February 2008 version 
of the draft, entities partially owned by a foreign government would 
face a 5 percent limit on unsupervised ownership. In December 2007, the 
Canadian government issued new guidelines to clarify how the Investment 
Canada Act applies to state-owned enterprises, including sovereign 
wealth funds. Entities within the United Kingdom and the Netherlands 
have also expressed concerns about foreign government-controlled 
investments, but the governments do not currently have plans to revise 
their foreign investment policies to address those concerns. 

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

Every country except China specifies time frames in which the review is 
to be completed. Time frames tend to be between 30 and 60 days, and in 
some cases the review may be extended up to 6 months. In Germany, a 

transaction is automatically approved unless it is denied within 30 
days of application. In Japan, the time frame for review is also 30 
days, but can be extended up to 5 months. France's review is required 
to be completed within 2 months. In Canada, the review should be 
completed within 45 days, with the possibility of a 30-day extension. 
In India, approval should be given within 30 days. However, a 
government official stated that, in practice, the review usually takes 
3 months. In Russia, the current anti-monopoly review time frame is 30 
days, but national security reviews have no set time frames.[Footnote 
20] Reviews in the United Kingdom must be completed within 6 months, 
although many are completed in 30 days. In several countries, including 
Canada, France, and Germany, the review time frame does not start until 
the reviewing body considers the application package complete. As a 
result, the period from the initial application to the official 
approval can be longer than the stated review period. 

The requirement of an investor to meet certain conditions prior to 
official approval of a transaction is common among six of the countries 
we reviewed. These conditions, also referred to as undertakings, 
contingencies, or mitigation agreements, were generally similar in each 
of the countries. For example, a country may place national citizenship 
requirements on an acquired company's board members, or a company may 
be required to maintain its defense contracts after an acquisition. 
Examples of conditions imposed by the French government include (1) 
guaranteed continuation of the activities of the company, (2) 
protection of the companies' research and development capabilities, and 
(3) guarantees that the company will meet its obligations under its 
current procurement contracts. In the United Kingdom, when foreign 
investors have acquired companies that produced items for the military, 
those investors have been required to agree to conditions related to 
the maintenance of strategic capabilities. For example, when a U.S. 
defense company acquired a defense company in the United Kingdom, the 
British government required the acquiring company to agree to certain 
conditions related to the protection of classified technology and 
information. We also found that similar conditions have been required 
in Canada and Russia. Further, some countries have required annual 
reporting by the investing companies to ensure adherence to the 
mitigation agreements, and may require divestment if the company does 
not adhere to the agreements. 

Of the eight countries with a review process, six maintain official 
thresholds for review, either dollar thresholds or a controlling or 
blocking stake, which may be defined differently in each country. China 
reviews all transactions at some government level. India requires 
government notification for all investments, and does not specify 
monetary thresholds for review. In Germany, an investor's failure to 
comply with the notification requirement may generate civil and 
criminal penalties. Countries generally rely on the fear of reprisal, 
fines, or mandatory divestment to encourage application and adherence 
to their review process, rather than actively pursuing companies that 
do not file. 

Unlike the United States, five countries allow judicial appeal of 
decisions or have an administrative procedure to ask for 
reconsideration of a decision made as a result of the review process. 
However, the appeals processes are rarely used, primarily because the 
review processes rarely result in a formal denial. 

Foreign Investment Is Affected by Factors outside Formal Processes: 

In practice, there are often informal or unofficial factors that may 
influence the success or failure of a potential foreign investment. 
Certain foreign investments may be considered sensitive by the host 
government; therefore, a firm may informally contact the host 
government to discuss the transaction prior to formal application for 
review. This was a common practice in several of the selected 
countries. Seeking unofficial preapproval can enable the potential 
investor to assuage any concerns the host government may have about the 
pending transaction. Likewise, if a host government is unlikely to 
approve a transaction, this can be communicated to the investor prior 
to the formal application process. In such a case, the investor may 
never apply for review because of unofficial feedback from government 
officials concerning the likelihood of approval. In other 
circumstances, a firm may withdraw its application for a review if it 
receives unofficial feedback from the government that the transaction 
is unlikely to be approved. 

Although the laws and policies that regulate the review of foreign 
investment are generally designed to be apolitical, for example, by 
basing the review mechanism in an administrative component of the host 
government, political influence in the public sphere may negatively 
affect the outcome of an attempted investment. Regardless of the 
official policy of the country, domestic politics play an important 
role in the review and approval of foreign investment. This can add a 
measure of uncertainty to the review process. According to the 
Organization for Economic Co-operation and Development (OECD), 
political pressure often occurs in areas of policy that are loosely 
defined, such as protecting national and cultural interests. Political 
figures may be able to block an investment on these grounds. 

While most governments support foreign direct investment in their 
economy, in some instances the perceived economic impact of a 
particular investment may still be a cause for concern. According to 
the OECD, countries may attempt to mask this by citing national 
security considerations or other legitimate national interests to block 
a foreign investment transaction. The European Commission has reported 
to the OECD that these reasons have been cited in several instances by 
European Union member states to disguise economic or protectionist 
actions.[Footnote 21] In some cases, host governments may seek to 
protect certain companies, "national champions," from external takeover 
or competition. National champions may be protected from foreign 
acquisition through, among other means, the public comments of 
political figures or the provision of government assistance to aid a 
company in seeking an alternative domestic merger partner. 

The public may also react negatively to foreign investment. For 
example, the 2006 Chinese mergers and acquisitions regulations allow 
competing domestic firms to request that the Chinese government review 
a foreign merger or acquisition for anti-trust concerns, a procedure 
that provides Chinese companies a legal process to become involved in 
decisions about foreign investment reviews of their competitors. 
Further, the public may react negatively to the sale of local companies 
to foreign firms because such sales may place a local region's economy 
in the control of a foreign entity. Local employees and residents may 
fear that foreign investment will increase the likelihood of layoffs 
and other reductions in force. The practice of foreign private equity 
firms purchasing a company to obtain its assets, and then laying off or 
significantly restructuring the local workforce so as to reap rapid 
profits through resale of the company, is a concern, and has been 
referred to as "vulture" and "locust" capitalism in Japan and Germany. 

Agency Comments and Our Evaluation: 

We requested and received written comments on a draft of this report 
from the Department of the Treasury. The comments are included in their 
entirety in appendix II of this report. In its letter, Treasury 
reemphasized the commitment of the United States to an open investment 
policy and stated that countries' general investment policies and the 
relationship of foreign investment reviews to those policies are 
important in understanding investment review regimes. Treasury 
coordinated with other CFIUS agencies in providing comments. Several 
agencies also provided technical comments, which we have incorporated 
as appropriate. 

We are sending copies of this report to the Chairman of the Senate 
Committee on Banking, Housing, and Urban Affairs and to the Chairman 
and Ranking Member of the House Committee on Financial Services. We 
will also send copies to the Secretaries of Commerce, Defense, 
Treasury, State, and the Office of the United States Trade 
Representative. We will also make copies available to others upon 
request. In addition, the report will be available at no charge on the 
GAO Web site at [hyperlink, http://www.gao.gov]. 

Please contact me at (202) 512-4841 or [email protected] if you 
have any questions regarding this report. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Appendix XIV lists the major contributors 
to this report. 

Signed by: 

Ann M. Calvaresi-Barr: 
Director: 
Acquisition and Sourcing Management: 

[End of section] 

Appendix I: Scope and Methodology: 

This report expands and updates a 1996 GAO report that compared the 
laws and processes governing foreign investment in Japan, France, 
Germany, and the United Kingdom.[Footnote 22] 

To identify the relevant laws and policies for regulating foreign 
investment in foreign countries, we selected a nongeneralizable sample 
of 10 countries based on the following criteria: the size of the 
reciprocal investment relationship with the United States, a variety of 
investment controls, regional diversity, prior GAO work in the subject 
area, and congressional interest. We held in-country interviews in 5 of 
the countries and collected basic information from officials in 
Washington, D.C., on the remaining 5 countries. 

We held in-country interviews with officials in: 

* Canada, 

* China, 

* France, 

* Germany, and: 

* Russia. 

We collected basic information from officials in Washington, D.C., on: 

* India, 

* Japan, 

* the Netherlands, 

* the United Arab Emirates, and: 

* the United Kingdom. 

The information on foreign laws and regulations in this report does not 
reflect our independent legal analysis, but is based on interviews and 
secondary sources such as analysis by the U.S. Library of Congress and 
our review of the laws in the original language, or translated copies 
of the various foreign laws obtained from foreign government officials, 
foreign government Web sites, or U.S. State Department sources. The 
U.S. Library of Congress compiled a summary of the laws and policies 
relevant to the regulation of foreign investment for each of the 
selected countries at our request. We also interviewed and obtained 
information from U.S. government officials from the Departments of the 
Treasury, Commerce, State, and Defense; the Office of the U.S. Trade 
Representative; and the Intelligence Community Acquisition Risk Center 
under the office of the Director of National Intelligence. In addition 
to Washington, D.C., based sources, we interviewed U.S. embassy 
representatives in Canada, China, France, Germany, and Russia as well 
as the U.S. Mission to the European Union. We also obtained information 
from U.S. embassy officials in India, Japan, the Netherlands, the 
United Kingdom, and the United Arab Emirates. 

We interviewed or obtained information from foreign government 
officials at each of the 10 embassies in Washington, D.C. For 5 of the 
countries---Canada, China, France, Germany, and Russia---we met with 
representatives in various foreign government offices and discussed how 
foreign investment is regulated. 

We interviewed representatives from the European Commission in Belgium 
and the Organization for Economic Co-operation and Development (OECD) 
in France. We reviewed reports from the OECD, the United Nations 
Conference on Trade and Development (UNCTAD), the International 
Monetary Fund (IMF), and the Eurasia Group, among others, to obtain 
information about foreign investment review processes, laws, and 
policies, as well as basic figures for comparing foreign investment 
inflows. 

To identify how countries implement foreign investment regulations, we 
interviewed a broad range of representatives for each of the selected 
countries, including think tanks and other nongovernmental 
organizations, business and trade associations, chambers of commerce, 
law firms, and industry representatives that have invested in the 
selected countries, all of whom possessed expert knowledge about 
foreign investment. In Canada, China, France, Germany, and Russia, we 
interviewed representatives for these organizations that were based in- 
country as well as in the United States, while for India, Japan, the 
Netherlands, the United Kingdom, and the United Arab Emirates, we only 
interviewed organizations, firms, and businesses that had offices in 
the United States. 

While our observations provide a cross section of various types of 
foreign investment regimes, such observations are not representative of 
how all countries regulate foreign investment. Further, as reporting 
standards for foreign direct investment figures vary from country to 
country, we were unable to obtain comparable country-and sector- 
specific foreign direct investment-related data. We did obtain 
information and data available through UNCTAD, IMF, and OECD. Finally, 
it is impossible to know the full extent to which informal factors 
influence investment, and specifically the process for reviewing 
foreign direct investment. Although there has been significant cross- 
border investment, it is unknown how many potential foreign investments 
were forgone or never pursued because of the burden imposed by the 
regulations that were in place in a given country. Official figures for 
denials and approvals were not available for some of the countries we 
reviewed, and the figures that are available do not necessarily 
represent the extent to which foreign investment restrictions or 
barriers affect investment. Likewise, data do not exist to determine 
the number of transactions initially pursued that were withdrawn prior 
to receiving government approval. 

We conducted this performance audit from December 2006 to February 2008 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Department of Treasury: 

Department Of The Treasury: 
Washington, D.C. 20220: 

February 28, 2008: 

Ms. Ann Calvaresi-Barr: 
Director: 
Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Calvaresi-Barr: 

Thank you for providing the Department of the Treasury with the 
opportunity to review and comment on the draft of Government 
Accountability Office (GAO) report GAO-08-320, "Foreign Investment: 
Laws and Policies Regulating Foreign Investment in 10 Countries." We 
believe that the report is a useful summary and analysis of the foreign 
investment restrictions of the countries covered by the report, and we 
appreciate the significant research that went into the report. 

We offer the following comments that we believe would make the report 
even more useful to Congress, as well as to our international outreach 
efforts on these topics. 

The Committee on Foreign Investment in the United States (CFIUS) 
conducts national security reviews of certain foreign investments in 
U.S. businesses within the context of the long-standing U.S. commitment 
to open investment. President Bush reiterated this commitment in his 
Statement on Open Economies in May 2007, as well as in the
executive order he issued on January 23, 2008, instituting certain 
reforms to the CFIUS process to implement the Foreign Investment and 
National Security Act of 2007 (FINSA). The legislative history of FINSA 
also makes clear Congress's intention to maintain CFIUS' open 
investment orientation. 

FINSA, the new executive order, and our internal reforms to the CFIUS 
process demonstrate that it is possible to safeguard the national 
security while continuing to welcome foreign investment. These reforms 
ensure that CFIUS is able to conduct robust reviews to address national 
security concerns in each of its cases. Consistent with the U.S. open 
investment policy, the reforms also ensure that CFIUS will focus only 
on genuine national security concerns, not on broader economic or 
policy goals, including industrial policy. 

In his Statement on Open Economies, President Bush also stated that the 
United States is equally committed to securing fair, equitable, and 
nondiscriminatory treatment for U.S. investors abroad. Accordingly, 
Treasury is engaged with other countries, both bilaterally and 
multilaterally, to encourage them to ensure that any foreign investment 
review processes they may have or be considering are designed and 
conducted consistent with open investment principles. We will be 
placing special emphasis on this point in the coming months, during and 
after the issuance process for revised CFIUS regulations to implement 
FINSA. 

The general investment policies of the United States and the countries 
covered by the report, and the relationship of foreign investment 
reviews to those policies, are important to consider in order to 
understand and compare CFIUS and other countries' investment review 
regimes. 

We hope you will find these comments helpful. Please feel free to 
contact me if you would like to discuss any of our comments or have any 
other questions. 

Sincerely, 

Signed by: 

Nova Daly: 
Deputy Assistant Secretary for Investment Security and Policy: 

[End of section] 

Appendix III: Highlights of Recent Changes to Exon-Florio: 

On July 26, 2007, the President signed the Foreign Investment and 
National Security Act of 2007 (FINSA) into law.[Footnote 23] FINSA 
amends section 721 of the Defense Production Act of 1950, also known as 
the Exon-Florio amendment.[Footnote 24] The following provides a 
summary of some of the more significant changes to Exon-Florio, which 
became effective on October 24, 2007. FINSA provides that implementing 
regulations shall become effective no later than April 21, 2008. 

The Committee on Foreign Investment in the United States: 

Prior to FINSA, Exon-Florio gave the President the authority to 
investigate the impact of foreign acquisitions of U.S. companies on 
national security, and by executive order the President delegated that 
authority to the interagency Committee on Foreign Investment in the 
United States (CFIUS).[Footnote 25] FINSA statutorily establishes CFIUS 
to carry out reviews and investigations as well as other 
responsibilities assigned to it in the act or delegated by the 
President. FINSA also defines the membership of CFIUS, but allows the 
President to add the heads of other executive departments, agencies, or 
offices. Table 4 shows pre-and post-FINSA membership of CFIUS. 

Table 4: Changes in CFIUS Membership: 

Established by executive order prior to FINSA: 
Secretary of the Treasury (chair); 
Secretary of Commerce; 
Secretary of Defense; 
Secretary of Homeland Security; 
Secretary of State; 
Attorney General of the United States; 
Chairman of the Council of Economic Advisors; 
Director of the Office of Management and Budget; 
Director of the Office of Science and Technology Policy; 
The U.S. Trade Representative; 
Assistant to the President for Economic Policy (National Economic 
Council); 
Assistant to the President for National Security Affairs (National 
Security Council); 

Established by FINSA and Amendment of Executive Order 11858, issued 
January 23, 2008: 
Secretary of the Treasury (chair).
Secretary of Commerce; 
Secretary of Defense; 
Secretary of Homeland Security; 
Secretary of State; 
Attorney General of the United States; 
Chairman of the Council of Economic Advisors; 
Director of the Office of Management and Budget; 
Director of the Office of Science and Technology Policy; 
The U.S. Trade Representative; 
Assistant to the President for Economic Policy (National Economic 
Council); 
Assistant to the President for National Security Affairs (National 
Security Council); 
Assistant to the President for Homeland Security and Counterterrorism; 
Secretary of Energy; 
Secretary of Labor (nonvoting, ex officio); 
Director of National Intelligence (nonvoting, ex officio); 
The heads of any other executive department, agency, or office, as the 
President or the Secretary of the Treasury determines appropriate, on a 
case-by-case basis. 

Sources: Exec. Order No. 11858, as amended, and Pub. L. No. 110-49. 

Note: New members added by FINSA are in bold. Members added by the 
Amendment to the Executive Order are in italics. 

[End of table] 

Critical Infrastructure: 

Although transactions involving U.S. critical infrastructure were 
reviewed and investigated by CFIUS in the past, Exon-Florio did not 
explicitly provide for reviews or investigations of critical 
infrastructure. FINSA specifically identifies critical infrastructure 
as an area of concern. For example, FINSA explicitly requires CFIUS to 
investigate transactions that involve critical infrastructure if the 
transaction could impair the national security of the United States and 
the impairment has not been mitigated.[Footnote 26] Also, FINSA 
specifically identifies the effect of a transaction on United States 
critical infrastructure as a factor that must be considered by CFIUS in 
conducting a national security review. 

Investigations: 

Prior to FINSA, Exon-Florio provided for a 45-day investigation to 
determine the effects of a transaction on the national security of the 
United States, and for a mandatory investigation in those cases in 
which the acquiring company is controlled by or acting on behalf of a 
foreign government and the transaction could affect the national 
security of the United States. FINSA specifically provides for a 45-day 
investigation when: 

* the lead agency responsible for negotiating mitigation agreements and 
other conditions and for monitoring compliance with mitigation 
agreements recommends an investigation and CFIUS agrees, or: 

* whenever a review results in a determination that: 

- the transaction threatens national security and the threat has not 
been mitigated; 

- the transaction is a foreign government-controlled transaction; or: 

- the transaction would result in control of critical infrastructure, 
CFIUS determines that the transaction could impair national security, 
and the impairment has not been mitigated. 

However, FINSA also provides that an investigation is not required for 
foreign government-controlled transactions or transactions involving 
critical infrastructure if the Secretary of the Treasury and the lead 
agency jointly determine that the transaction will not impair the 
national security of the United States. 

Factors to Be Considered: 

FINSA has expanded the number of factors for CFIUS and the President to 
consider in conducting reviews and investigations and making 
determinations of whether a transaction poses a threat to national 
security. Under FINSA, CFIUS and the President must consider, as 
appropriate, the following additional factors:[Footnote 27] 

* the potential national security-related effects on U. S. critical 
infrastructure, including major energy assets; 

* the potential national security-related effects on U.S. critical 
technologies; 

* whether the transaction is a foreign government-controlled 
transaction; 

* as appropriate, and particularly with respect to transactions 
requiring an investigation, a review of the current assessment of: 

- the acquiring country's adherence to nonproliferation regimes; 

- the relationship of the acquiring country with the United States, 
specifically on its record on cooperating in counterterrorism efforts; 
and: 

- the potential for transshipment or diversion of technologies with 
military applications, including an analysis of national export control 
laws and regulations; 

* the long-term projection of U.S. requirements for sources of energy 
and other critical resources and material; and: 

* the potential effects of the transaction on sales of military goods, 
equipment, or technology to any country identified by the Secretary of 
Defense as posing a potential regional military threat to the interests 
of the United States. 

Mitigation Agreements: 

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

Tracking Withdrawn Notices: 

Prior to FINSA, Exon-Florio contained no provisions for actions to be 
taken in the event companies withdrew an official notification to 
CFIUS, although the implementing regulations provided procedures to 
companies on how to request a withdrawal. FINSA specifically provides 
for CFIUS to establish, as appropriate: 

* interim protections to address concerns raised during the review or 
investigation, 

* time frames for the companies to resubmit notification to CFIUS, and: 

* a process for tracking any actions the companies may take before the 
companies resubmit the notification. 

Reporting to Congress: 

FINSA has expanded Exon-Florio's requirement for reports to Congress. 
Prior to FINSA, Exon-Florio required the President to submit a report 
to Congress only when the President made a determination whether or not 
to take action to block or suspend an acquisition using the authority 
of Exon-Florio. The report was required to address only the acquisition 
that was the subject of the presidential determination. FINSA requires 
annual reporting to specific congressional committees on all reviews 
and investigations completed by CFIUS during the preceding 12-month 
period, as well as a certified report on the results of any 
investigation shortly after CFIUS concludes the investigation, unless 
the transaction under investigation is sent to the President for a 
decision.[Footnote 28] FINSA also provides for CFIUS to provide 
briefings to specific Members of Congress on any transaction that has 
been concluded. 

[End of section] 

Appendix IV: Canada: 

Figure: Foreign Investment in Canada (stocks and flows 2000-2006), U.S. 
dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $210; 
Flow: $70. 

Year: 2001; 
Stock: $210; 
Flow: $25. 

Year: 2002; 
Stock: $220; 
Flow: $20. 

Year: 2003; 
Stock: $300
Flow: $5. 

Year: 2004; 
Stock: $320; 
Flow: $0. 

Year: 2005; 
Stock: $350; 
Flow: $20. 

Year: 2006; 
Stock: $375; 
Flow: $50. 

Source: United Nations (data). 

[End of figure] 

* Canada ranked sixth in terms of the average value of foreign direct 
investment (FDI) inflows worldwide between 2000 and 2006. 

* In 2006, FDI in Canada totaled $385.2 billion, an increase of 81 
percent over FDI stock in 2000. 

* FDI stock in Canada as a proportion of gross domestic product (GDP) 
was 30.4 percent in 2006. 

* Canada was the second most popular destination for U.S. FDI, behind 
the United Kingdom as of 2006. 

Background: 

Canada became a self-governing dominion in 1867 while retaining ties to 
the British crown. Canada is a constitutional monarchy with a federal 
system, a parliamentary government, and democratic traditions. Criminal 
law, based largely on British law, is uniform throughout the nation and 
is under federal jurisdiction. Civil law is also based on the English 
common law, except in Quebec, which has retained its own civil code 
patterned after that of France. Justice is administered by federal, 
provincial, and municipal courts. 

For decades, foreign investment has been significant to Canada's market 
economy. The United States, the United Kingdom, France, and the 
Netherlands are Canada's largest foreign investors. At the end of 2006, 
the stock of U.S. investment in Canada was $241 billion, about 61 
percent of total foreign investment in Canada. Economic sectors with a 
relatively high foreign presence include manufacturing, oil and gas, 
wholesale trade, transportation and warehousing, and finance and 
insurance. Recently, merger and acquisition activity has been the 
largest part of foreign investment flows into Canada, accounting for 71 
percent of inward foreign investment in 2005 and 2006, according to the 
Canadian government. 

Canada is signatory to the World Trade Organization (WTO) Agreement and 
the North American Free Trade Agreement (NAFTA). Under WTO and NAFTA, 
Canada is generally required to provide national treatment and most 
favored nation status so that foreign investors are treated no less 
favorably than domestic investors with respect to the establishment, 
acquisition, management, and sale of investments. 

Foreign Investment Laws and Policies: 

The Canadian government, through the Investment Canada Act (ICA), 
provides for a foreign investment review process in order to ensure 
that the investment is likely to be of "net benefit" to 
Canada.[Footnote 29] Under the ICA, Canada's investment review process 
is managed by Industry Canada and led by the Minister of Industry. 
According to a Canadian government official, in the late 1990s, the 
review of cultural investments was shifted to Canadian Heritage under 
the direction of the Minister of Canadian Heritage. Ministry officials 
review all cases and identify other government ministries that need to 
be involved. For example, Industry Canada would consult with Natural 
Resources Canada for an acquisition dealing with oil or gas. All non- 
Canadians must file a notification with either Industry Canada or 
Canadian Heritage when they begin a new business in Canada or acquire 
an existing Canadian business. However, only transactions whose asset 
value reaches certain thresholds require a review.[Footnote 30] The 
relevant Minister of either Industry Canada or Canadian Heritage makes 
the final decision on transactions. 

Sensitive Sectors and Criteria for Review: 

National security is not currently a part of Canada's foreign 
investment review process. Instead, the review considers a series of 
economic factors, as well as national cultural policy objectives. While 
Canadian officials told us that the ICA is not driven by national 
security, a number of laws, regulations, and policies allow Canada to 
deal with national security concerns stemming from foreign investments 
in certain sectors. Canada requires government review and approval in 
uranium production, financial services, transportation services 
(including pipelines), and cultural businesses.[Footnote 31] However, 
there is no specific exemption for the petroleum industry in the act. 
The financial sector is subject to ownership restrictions, and 
foreigners are limited to 25 percent ownership of air carriers, and 33 
percent ownership in telecommunications companies. The Department of 
Canadian Heritage reviews investments in businesses that affect 
Canada's cultural heritage, including the publication of books, 
magazines, and newspapers as well as film and music production. 

The factors assessed in the ICA review are (1) the effect of the 
investment on the level and nature of economic activity in Canada, 
including employment, resource processing, domestic sourcing, and 
exports; (2) the degree and significance of Canadian participation in 
the business enterprise and in the industry sector to which the 
enterprise belong; (3) the effect on productivity, industrial 
efficiency, technological development, innovation, and product variety 
in Canada; (4) the effect on competition in Canada; (5) the impact of 
the investment on Canada's ability to compete in world markets; and (6) 
the compatibility of the investment with national industrial, economic, 
and cultural policies, taking into consideration industrial, economic, 
and cultural policy objectives of any province likely to be 
significantly affected by the investment. 

New Developments: 

On June 20, 2005, the Canadian government introduced a bill to amend 
its foreign investment review process. According to U.S. and Canadian 
government officials, the proposed bill included provisions to allow 
the government to review foreign investment based on national security 
concerns.[Footnote 32] The proposed law did not define national 
security and would have required the responsible minister to recommend 
a review, according to Canadian government officials. In addition, a 
transaction would have been reviewed only if it came to the attention 
of the intelligence or defense communities and they determined that it 
needed to be reviewed. According to U.S. government officials, this 
bill was partially driven by concerns about recent attempts by Chinese 
firms to acquire Canadian natural resource assets. However, the 
Canadian Parliament was dissolved at the end of 2005 prior to the 2006 
election, and the bill was never passed. 

In 2006, the Department of Finance Canada issued Advantage Canada, an 
economic planning document stating that the Canadian government would 
review its foreign investment policy framework, including the 
Investment Canada Act, with the goal of maximizing the benefits of 
foreign investment for Canadians while retaining its ability to protect 
national interests. The Canadian government has stated that there may 
be rare occasions where a particular foreign investment might damage 
Canada's long-term interests. For example, foreign investment by state- 
owned enterprises with noncommercial objectives and unclear corporate 
governance may not be beneficial to Canadians. Further, the Minister of 
Industry stated in October 2007 that the Canadian government's concern 
is to ensure that state-owned enterprises in Canada are operating under 
the same standards as any other commercial enterprise in Canada, 
including those related to transparency, good governance, and free 
market principles. In December 2007, the Canadian government issued new 
guidelines to clarify how the Investment Canada Act applies to state- 
owned enterprises, including sovereign wealth funds. 

In July 2007, a Competition Policy Review Panel was created by the 
Canadian government to review key elements of Canada's competition and 
investment policies. The panel is to consider whether or not the 
government should develop new rules to protect Canada's national 
interests. The panel is expected to report to the Minister of Industry 
by June 30, 2008 with recommendations. The government of Canada is also 
separately examining the need for a mechanism to screen foreign 
investment on the basis of national security. According to a paper 
issued in October 2007 by the Competition Policy Review Panel, while 
Canadians have always been concerned about foreign influence on the 
Canadian economy, this concern has been exacerbated by a recent series 
of significant takeovers of a number of prominent Canadian firms by 
foreign investors, including mining companies like Falconbridge and 
Inco.[Footnote 33] 

Review Process: 

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

The review includes the following steps: 

1. Government officials verify the application is complete. 

2. Case officers share certain information with relevant government 
offices, both federal and provincial, and with the Competition Bureau. 

3. Industry Canada and/or Canadian Heritage discuss the results of the 
review with the investor. 

Conditions for Approval: 

To be granted approval for a transaction, investors must demonstrate 
that their investment will likely be of net benefit to Canada through 
their business plans and the conditions for approval, also called 
undertakings, which they negotiate with the Canadian government. The 
conditions for approval generally focus on future plans for the 
business following the completion of the transaction. According to the 
Canadian government, there has been a shift over time toward conditions 
related to productivity, technology transfer, and efficiency, and away 
from a focus on employment. Common conditions for approval might 
include the following: 

* Canadian participation on the acquired company's board, usually 25 
percent; 

* Canadian participation in the acquired company's management; 

* research and development expenditures; 

* employment levels; 

* productivity improvements; and: 

* exploration expenditures for transactions involving mining. 

[End of section] 

Appendix V: China: 

Figure: Foreign Investment in Chinaa (stocks and flows 2000-2006), U.S. 
dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $180; 
Flow: $30. 

Year: 2001; 
Stock: $200; 
Flow: $35. 

Year: 2002; 
Stock: $215; 
Flow: $40. 

Year: 2003; 
Stock: $230
Flow: $40. 

Year: 2004; 
Stock: $240; 
Flow: $50. 

Year: 2005; 
Stock: $260; 
Flow: $60. 

Year: 2006; 
Stock: $280; 
Flow: $55. 

Source: United Nations (data). 

[End of figure] 

* China is the third largest recipient of FDI in the world, ranking 
behind the United States and the United Kingdom in terms of the average 
value of FDI inflows between 2000 and 2006. 

* In 2006, FDI in China totaled $292.6 billion, an increase of 51 
percent since 2000. 

* FDI stock in China as a proportion of GDP was 11.1 percent in 2006. 

Background: 

Over the last several decades, China's economy has moved from a 
centrally planned system that was largely closed to international trade 
to a more market-oriented system. Since 1978 China's GDP has increased 
more than 1,000 percent. According to U.S. State Department officials, 
the development of Chinese investment regulations has not kept pace 
with the development of its markets, and the complexity of the foreign 
investment review process reflects vestiges of China's past as a 
planned economy. Since the period of economic reform began, China has 
continued to review inward investment to ensure proposed projects 
conform to China's industrial policy and national interests. Foreign 
investment in China typically began in the form of equity joint 
ventures in the manufacturing sector and, according to industry 
officials, has progressed to the point where foreigners can merge with 
or acquire entire Chinese companies. 

Several Chinese government entities are involved in the review of 
foreign investment, including the following: 

* State Council: The State Council is China's chief executive and 
administrative authority. Members include the Premier, as the head of 
government; a variable number of vice premiers; 22 ministers; and 4 
State Council commission directors. 

* National Development and Reform Commission (NDRC): The NDRC is the 
State Council's economic policy planning arm. According to U.S. and 
industry officials, it is a powerful macroeconomic management agency 
with broad planning control over the Chinese economy, and specific 
control over heavy industry. U.S. and industry officials have stated 
that the NDRC is deeply involved in the review of foreign investment 
transactions. 

* Ministry of Commerce (MOFCOM): MOFCOM is under the State Council and 
is charged with managing China's external economic relations. Its 
duties include formulating trade policy, regulating foreign 
participation in markets, implementing import and export quotas, 
implementing trade and economic cooperation policies, and guiding 
foreign investment. 

* State-owned Assets Supervision and Administration Commission (SASAC): 
SASAC is a commission under the State Council that represents the 
central government's ownership interests in 159 state-owned enterprises 
(SOE). As part of its duties, SASAC guides SOE reform, drafts laws and 
regulations on SOE management, and supervises the preservation of SOE 
value. 

* State Administration for Industry and Commerce (SAIC): SAIC is a 
State Council ministry in charge of supervising market competition, 
investigating illegal trade, regulating contract performance, and 
handling trademark registration and administration. 

Foreign Investment Laws and Policies: 

According to Chinese officials, China's system of written law can be 
broken into different categories according to their level. Chinese laws 
that are broad and general form the highest level. They are passed by 
the Chinese legislative body, the National People's Congress, during 
its annual meeting in Beijing. At the next level are regulations that 
are issued by individual state ministries and are intended to interpret 
and characterize laws. Below that are guiding opinions. According to 
Chinese officials, opinions are not binding and are used as planning 
documents. However, according to one U.S. official, they are assumed to 
carry the weight of law. According to Chinese officials, since Chinese 
laws are broad and general, regulations and guiding opinions provide 
the real substance of the Chinese legal system. 

In 2006, China began to adopt laws and regulations to describe the 
procedures it uses to review, and potentially block, proposed foreign 
acquisitions that it deems are not in China's national interest. 
According to Chinese officials, two regulations provide the primary 
framework for China's foreign investment review. First, the 2006 
Provisions for Merger and Acquisition of Domestic Enterprises by 
Foreign Investors (the 2006 regulations)[Footnote 34] are the most 
important rules for managing foreign investment. According to the 
Organization for Economic Co-operation and Development, these 
regulations bring China closer to international norms for foreign 
investment reviews and increase regulatory transparency. 

The 2006 regulations establish the need for government approval of 
foreign investment if the transaction: 

* affects national economic security, 

* involves a major industry, or: 

* results in the transfer of famous trademarks or traditional Chinese 
brands. 

If foreign investors fail to apply for approval, the Chinese government 
has the legal authority to force divestiture if a transaction causes or 
may cause significant impact on China's economic security. 

Second, the Chinese Catalog for the Guidance of Foreign Investment 
Industries (the Catalog) restricts foreign investment in specified 
sectors. A revised version of the Catalog was issued by the NDRC in 
November 2007. According to Chinese officials, the Catalog is a 
reflection of industrial policy and is intended as a guide for foreign 
investors. It assigns industry sectors to one of three categories: 
"encouraged," "restricted," and "prohibited." Investment in unlisted 
sectors is automatically considered "permitted." 

According to the U.S. Investment Climate Statement on China, the 
Catalog prohibits foreign investment in sectors that China views as key 
to its national security. However, the Catalog does not prohibit 
investment for stated reasons, or define national security, although 
some industries clearly fall into that category, including weapons and 
ammunition manufacturing, mining and processing of radioactive 
materials and rare earth metals, and construction and operation of 
power networks. Other sectors are prohibited based on a broader 
definition of national security, including film, television, book 
publishing, and other media production. Other prohibited sectors appear 
completely unrelated to national security, including processing special 
Chinese teas, preparation of traditional Chinese medicines, and 
production of enamel products and rice paper. According to U.S. and 
Chinese government officials, foreign investment in certain sectors may 
be encouraged if the investment would bring advanced technology into 
China that would benefit China's future economic development. Further, 
according to a U.S. State Department official, industry representatives 
have stated that China intends to restrict or ban foreign investment in 
sectors deemed strategic or sensitive to economic security. 

Additional Foreign Investment Laws and Policies: 

Other Chinese laws, regulations, and opinions also regulate foreign 
investment. However, only the Anti-Monopoly Law does so explicitly for 
national security. 

* The State Council's Opinions on Revitalizing the Industrial Machinery 
Industry: Suggests that "large, key and backbone equipment 
manufacturers" obtain government approval when transferring a 
"controlling stake" to foreign investors. It also calls for China to 
expand the market share of domestic companies in 16 equipment- 
manufacturing fields. 

* The Guiding Opinion Concerning the Advancement of Adjustments of 
State Capital and the Restructuring of State-Owned Enterprises: Lists 
seven sectors the government deems critical to the national economy, 
which must be kept under government control, including defense, power 
generation and distribution, oil and petrochemicals, 
telecommunications, coal, aviation, and shipping. 

* The Anti-Monopoly Law: Adopted in August 2007, and becomes effective 
in August 2008. The law creates an antitrust review of foreign and 
domestic mergers and acquisitions and also orders the government to 
create a process to review inward investment for national security 
concerns. As of January 2008, implementing regulations for the law had 
not been released. 

* Three overarching laws guide foreign investment: The Equity Joint 
Ventures Law, the Foreign Contractor Joint Ventures Law, and the 
Foreign Capital Enterprises Law. However, since Chinese laws are very 
general, the implementing regulations associated with each of these 
laws are more important for understanding foreign investment controls. 

* According to Chinese officials, China has other industry-and sector- 
specific laws to control foreign investment; for example, in 
telecommunications or financial services. In total, China has more than 
200 laws and regulations that involve foreign investment. 

Review Process: 

China has a nominal process for reviewing all foreign mergers and 
acquisitions. The standards that China uses to conduct reviews of 
foreign investment are opaque, and have resulted in a system that is 
not fully transparent. However, it is clear that in addition to 
national security concerns, they also include an assessment of whether 
a given investment conforms to China's economic development plan. 
Various factors make China's foreign investment review process 
unpredictable in practice. Factors affecting the review process include 
(1) competitor firms generating negative public attention that may 
influence relevant officials, (2) bureaucratic infighting, (3) 
differences in priorities between the local and central level Chinese 
government related to their motivations for the approval of foreign 
investment, (4) the Chinese political calendar, and (5) regulatory 
ambiguity and lack of procedural transparency. All five factors can 
affect the outcome of a particular review, resulting in an application 
process that is unpredictable for investors. In addition, China's 
foreign investment regulations are considered complex, in transition, 
and lack definitions for key terms, making the review process 
ambiguous. 

According to Chinese officials, there is one review process with many 
facets, and all transactions must go through the Ministry of Commerce. 

Figure 2: Nominal Foreign Investment Review Process: 

[See PDF for image] 

This figure is an illustration of the flow of the Nominal Foreign 
Investment Review Process. The following data is depicted: 

1) Foreign firms: 
Apply to local/provincial MOFCOM. 

2) Local/provincial MOFCOM: 
Reviews and approves the majority of small mergers and acquisitions. If 
steps 3, 4, and 5 are not needed, proceed to step 6. 

3) Central MOFCOM: 
Acts as a clearinghouse for large or politically sensitive merger and 
acquisition reviews. 

4) Relevant actors: 
(Actors might include the NDRC, SASAC, sector-specific regulators, 
others). 

5) Central MOFCOM: 
Provides official approval. 

6) Local/provincial government and SAIC: 
Provide registration and licensing. 

Source: GAO analysis of information from Chinese Government officials. 

Note: Steps 3 and 4 may occur simultaneously; Step 4 is sometimes 
omitted. 

[End of figure] 

Step 1: All foreign investors must apply to the local or provincial- 
level Ministry of Commerce when attempting to merge with or acquire a 
Chinese firm. 

Step 2: Most small transactions are reviewed and approved by the local- 
level Ministry of Commerce and then go to the local-or provincial-level 
government for registration and licensing. (Step 6.) If the local 
MOFCOM does not submit the review to the national-level MOFCOM, then it 
will distribute the application to the local subsidiaries of NDRC and 
SASAC, etc. These local subsidiaries may then forward the review to 
their national-level representatives if they find something of concern. 
(Step 4.) 

Step 3: The central-level Ministry of Commerce reviews large or 
politically sensitive transactions. Factors affecting political 
sensitivity might include the size of the transaction, whether a state- 
owned enterprise is involved, whether the sector itself is sensitive, 
and whether actors involved in the transaction are connected to the 
State Council. At this point, the central-level Ministry of Commerce 
acts as the administrative coordinator for the review. 

Step 4: Other relevant actors provide "preapproval." This step 
generally determines whether or not a transaction will be approved. The 
NDRC plays an important role in the review as the lead economic 
planning agency, as does SASAC in cases involving Chinese state-owned 
enterprises. 

Step 5: The central-level Ministry of Commerce reviews the application 
and provides the official approval or denial. If another governmental 
entity has jurisdiction, the Ministry of Commerce will rely on it to 
determine approval or denial. Within 6 months of a transaction being 
approved, the Ministry of Commerce issues a certificate of foreign 
investment. 

Step 6: Once the central-level Ministry of Commerce issues a 
certificate of foreign investment, the foreign company has 1 month to 
obtain a business license and register the business with the State 
Administration of Industry and Commerce. 

China's foreign investment review process is unpredictable. While the 
great majority of transactions are cleared without incident, the 
review's multiple layers and ambiguous standards allow intervention by 
parties opposed to a transaction, according to U.S. State Department 
officials. For example, the 2006 regulations state that domestic 
competitors of the Chinese firm being acquired can request that the 
Chinese government review a transaction for anti-trust concerns. 
According to U.S. and industry officials, domestic competitors can also 
indirectly affect transactions by generating negative public attention 
around a deal that could then affect decision makers. For example, when 
a U.S. private equity firm attempted to purchase 85 percent ownership 
of a construction machinery company, the chief executive officer of a 
rival Chinese firm stated that selling the company to a foreign firm 
was not in China's interest, and he reportedly worked to derail the 
transaction. Recently this type of interference has become more common. 

A second factor that can slow approvals is bureaucratic infighting. 
According to U.S. and industry officials, a number of Chinese 
bureaucracies have overlapping jurisdictions and competing interests, 
which can affect the outcome of a particular review. For example, 
Chinese officials in the Ministry of Commerce and the State 
Administration of Industry and Commerce both suggested they conducted 
anti-trust reviews, but, according to U.S. State Department officials, 
there appears to be little coordination of their efforts. This 
overlapping claim is indicative of the lack of clarity regarding what 
governmental bodies are involved in a given review. 

A third factor that can affect approvals is the difference in 
incentives between the local and central level Chinese government when 
approving foreign mergers and acquisitions. According to U.S. 
government officials, there is a split between the central government, 
which is concerned about implementing social policies, and the local 
governments, which are more concerned with economic growth, providing 
jobs, and attracting investment. Since local governments have a large 
degree of influence in the approval process, they are one of the major 
forces counteracting protectionist tendencies in China. 

A fourth factor is the Chinese political calendar. According to U.S. 
and industry officials, foreign firms can have increased difficulty 
getting government approval for mergers and acquisitions in the year 
preceding a Chinese Communist Party congress. The Chinese Communist 
Party convenes a party congress approximately every 5 years. At these 
events, the party decides its future policy positions and selects new 
leadership. According to U.S. and industry officials, the atmosphere 
preceding a party congress is politically charged. Since the appearance 
of appeasing foreigners can have negative political repercussions in 
the Chinese political system, many Chinese officials are apprehensive 
about approving any foreign investments during this time. In 
particular, since most top executives at state-owned enterprises are 
party members, investments that affect powerful vested interests, 
particularly in state-dominated sectors, or those that risk being 
viewed as contrary to central government policies, are more likely to 
face political interference according to the U.S. State Department. 

In addition to those factors, according to U.S. officials and industry 
representatives, the relationships among various laws and regulations 
are complex and unclear. This lack of clarity lessens the ability of 
foreign firms to predict the likelihood of government approval of an 
investment. For example, Chinese officials stated that the 2006 
regulations and the Catalog provide the primary regulatory framework 
for reviewing and regulating foreign investment. However, they could 
not articulate the relationship between the two other than to say that 
the Catalog is one of many factors considered in the review process. 
Moreover, according to a U.S. government official, Chinese laws tend to 
be vaguely worded and general in nature. This allows implementing 
ministries leeway in interpreting these measures. Implementing rules 
sometimes offer clarification. Further, according to the Organization 
for Economic Co-operation and Development, the 2006 regulations appear 
to create a new layer of review, in addition to the examination and 
approval process based on the Catalog. 

In another example, the State Council Opinion on Revitalizing the 
Industrial Machinery Industry calls for China to expand the domestic 
market share in 16 equipment-manufacturing fields. The Guiding Opinion 
Concerning the Advancement of Adjustments of State Capital and the 
Restructuring of State-Owned Enterprises lists seven sectors the 
government deems critical to the national economy, which must be kept 
in the state's hands. However, it is unclear how these opinions are 
related to the review process. A Chinese official from the commission 
that promulgated the list stated that it would be more difficult for a 
foreign firm to purchase a Chinese company in one of those sectors. 
However, another Chinese official did not view the list as important 
because it is nonbinding. 

The Chinese government has not defined key terms in the 2006 
regulations, contributing to a lack of transparency in the review 
process. The updated regulations add a screening requirement if the 
foreign investment transaction affects "national economic security," 
involves a "major industry," or results in the transfer of "famous 
trademarks" or "traditional" Chinese brands. However, the regulations 
do not define these terms, making it difficult for businesses to 
determine when screening is required and when it is not. 

According to U.S. government and industry officials, the definition of 
"national economic security" is particularly unclear. In fact, 
according to an industry official, the Ministry of Commerce has not 
publicly used national economic security as a reason for preventing a 
foreign merger or acquisition. According to the U.S. State Department, 
some Chinese scholars affiliated with more protectionist factions of 
the government use national economic security to refer to self- 
sufficient economic growth. Thus, investment that would lead China to 
become dependent on foreign participation in the economy to sustain 
economic growth should be restricted. Other Chinese scholars believe 
national economic security refers to economic development that promotes 
stability, such as a continued increase in living standards, progress 
on environmental protection, and the creation of jobs. Since China's 
leaders see economic development as key to maintaining internal 
stability, national security and national economic security are treated 
as equally important, according to Chinese and U.S. officials. In 
practice, the sectors China considers important to national security 
are listed as forbidden in the Catalog. 

Confusion over new regulations is common. According to industry 
representatives, the Chinese government sometimes promulgates a 
regulation that many, including those in the government charged with 
implementing the regulations, do not understand. Implementing 
regulations are key to spelling out the details of a law, but may be 
released after the law takes effect. When this occurs, the business 
community attempts to determine the parameters of the law or regulation 
through trial and error. Over time, the regulation will take shape. 
Accordingly, a U.S. State Department official said the lack of 
definitions and transparency in the 2006 regulations could be 
indicative of disagreements within the Chinese government regarding how 
to regulate foreign investment. Conversely, other U.S. and industry 
officials stated that the updated regulations are intended to allow the 
government discretion to restrict foreign investment when it is in its 
interest to do so. 

Recent Developments: 

According to U.S. and industry officials, several factors may have 
contributed to a slowdown in foreign investment approvals and activity 
starting in mid-2006. These factors include pragmatic concerns by the 
Chinese government about the appropriate level of foreign investment 
and protectionist concerns commonly characterized as economic 
nationalism. As the Chinese government has promulgated new regulations, 
industry uncertainty has grown regarding China's review process. 
However, according to U.S. officials, it is impossible to know whether 
the current slowdown in approvals will continue or if it is merely 
associated with temporary political conditions. Nevertheless, according 
to U.S. and industry officials, the long-term trend toward improved 
regulatory transparency and efficiency remains positive. 

Factors cited as affecting the review process and foreign investment 
activity include the following: 

* Rapid rise in foreign investment: Foreign mergers and acquisitions 
increased from 4 percent of foreign investment in 2002 to over 11 
percent in 2005. According to U.S. and industry officials, some Chinese 
government officials are concerned about increased foreign control over 
China's economy. 

* Historical antecedents: Large-scale foreign ownership of Chinese 
companies can appear to the Chinese as foreign encroachment, drawing on 
historical fears of foreigners taking control of their country. 

* Populist perceptions of foreign investment: According to U.S. and 
industry officials, many people in China believe their country has sold 
vital state-owned enterprises and traditional Chinese brands to 
foreigners at below-market value. They fear China will lose its best 
companies to foreigners. In addition, they perceive that many foreign 
countries would not sell similar assets to Chinese companies. 

* High-profile transactions: The U.S. State Department has reported 
that senior Chinese officials frequently point to the failure of China 
National Offshore Oil Corporation's (CNOOC) attempt to purchase the 
U.S. oil company Unocal as justification for China's new investment 
screening mechanisms. Later, a U.S.-based company's attempted purchase 
of a Chinese machinery company led to a public outcry against foreign 
acquisitions in China. 

* Competitor's interventions: Chinese businesses are becoming more 
adept in using domestic media to generate opposition to inward 
investment that threatens their businesses. 

* Desire to build world-class companies: According to Chinese and U.S. 
officials, the Chinese government wants to develop world-class 
companies that can compete internationally. This includes developing 
famous Chinese brands so that Chinese firms can retain a larger share 
of the profits from products they manufacture. The government would 
likely oppose foreign takeovers of these companies. 

* New regulations: In June 2006 the State Council released an opinion 
defining machinery and capital equipment as pillar industries, and 
stating that selling key enterprises to foreigners will require its 
approval. In December 2006 SASAC released its list of seven sectors the 
government deems critical to the national economy. In August 2007 the 
National People's Congress promulgated the Anti-Monopoly Law, adding a 
national security examination to China's review process. 

* Change in industrial policy: In November 2006 the Chinese government 
released its 11th 5-year plan on foreign capital utilization, wherein 
it emphasized a shift from "quantity" to "quality" of foreign 
investment, including plans to restrict environmentally damaging and 
energy inefficient investments. Chinese Vice Premier Wu Yi said the 
shift in emphasis had also occurred because China had rectified its 
capital deficiency. 

* Macroeconomic controls: Investment contributes an unusually large 
proportion of China's economic growth. Overcapacity may be building in 
some sectors, and the government is seeking to slow investment 
generally, according to U.S. State Department officials. 

* Currency stability: Chinese government concerns exist about excessive 
foreign exchange inflows that could affect the appreciation of Chinese 
currency and money supply growth. 

* Political season: In October 2007 the Chinese Communist Party held 
its Party Congress. According to U.S. and industry officials, 
government officials were hesitant to approve foreign mergers or 
acquisitions during the months leading up to the Party Congress. Large 
or politically sensitive deals were especially subject to being 
delayed, according to U.S. officials and industry representatives. 

* Other factors: The equalization of tax rates for foreign and domestic 
enterprises, the impact of rising labor costs, and the influence of 
regulatory issues such as the new labor contract law. 

[End of section] 

Appendix VI: France: 

Figure: Foreign Investment in United Kingdom (stocks and flows 2000-
2006), U.S. dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $250; 
Flow: $20. 

Year: 2001; 
Stock: $300; 
Flow: $20. 

Year: 2002; 
Stock: $380; 
Flow: $20. 

Year: 2003; 
Stock: $520; 
Flow: $20. 

Year: 2004; 
Stock: $620; 
Flow: $15. 

Year: 2005; 
Stock: $600; 
Flow: $50. 

Year: 2006; 
Stock: $720; 
Flow: $50. 

Source: United Nations (data). 

[End of figure] 

* France ranked fifth in terms of the average value of FDI inflows 
worldwide between 2000 and 2006. 

* In 2006, FDI stock in France totaled $782.8 billion, an increase of 
approximately $523 billion since 2000. 

* FDI stock in France as a proportion of GDP in France was 35 percent 
in 2006. 

* The United States is the leading investor in France, followed by 
Germany and the United Kingdom. 

Background: 

France, as a member of the European Union, is subject to the articles 
of the European Community Treaty (EC Treaty). The articles relevant to 
foreign investment include the requirement that EU member states allow 
the free movement of capital, as well as allow investors from other 
countries to conduct business within the member state 
unencumbered.[Footnote 35] However, under the EC Treaty, EU member 
states retain the right to impose restrictions on foreign investment 
based on public security considerations, as long as those restrictions 
do not result in arbitrary discrimination or a disguised restriction on 
trade.[Footnote 36] 

Foreign Investment Laws and Policies: 

France regulates foreign direct investment for national security 
considerations through Decree No. 2005-1739, which implements Article 
L. 151 of the French Monetary and Financial Code. The 2005 Decree lists 
11 specific sectors subject to foreign investment regulation on the 
grounds of defending France's public order, public safety, or national 
defense interests, as well as introduces a distinction between EU 
investors and non-EU investors, with a less restrictive regime 
applicable to the former. According to the French Monetary and 
Financial Code, financial dealings between France and foreign countries 
are unrestricted.[Footnote 37] However, certain exceptions to this 
general policy relate to the regulation of foreign investment for 
national security considerations. The code states that the French 
government may require a range of foreign exchange transactions, which 
includes mergers, acquisitions, and other types of foreign investment, 
to be subject to prior approval by the French government if they may 
jeopardize public order, public safety, or national defense 
interests.[Footnote 38] In addition, foreign investment in the 
research, production, and marketing of arms, munitions, or explosives 
is also subject to prior approval. Approval may be granted by the 
government based on conditions. Failure on the part of the investor to 
agree to these conditions may result in approval for the investment 
being denied.[Footnote 39] 

European Court of Justice Ruling in 2000 Led to Current Regulations: 

In 2000, in a case brought before the European Court of Justice (ECJ), 
the ECJ ruled that France had violated the EC Treaty provisions on the 
free movement of capital.[Footnote 40] France had restricted the 
transfer of funds from abroad to the French Church of Scientology, on 
the grounds that French public security interests were at stake. At the 
time, French law required an advance authorization for any foreign 
investment that might present a threat to public security--a 
requirement the ECJ found to be overly broad.[Footnote 41] As a result, 
France promulgated Decree No. 2005-1739, which implements Article L. 
151-3 of the French Monetary and Financial Code, in December 2005. 

The French decision to include gambling/casinos as one of the specified 
sectors subject to review, as well as the distinctions made between EU 
and non-EU investors, has caused further tension between France and the 
European Commission.[Footnote 42] The European Commission began 
infringement proceedings, and in October 2006, formally asked France to 
amend its regulations.[Footnote 43] As of February 2008, France had 
made proposals to address the European Commission concerns, and 
discussions are ongoing. 

Review Process: 

France's Ministry of Economy, Finance, and Employment leads the foreign 
investment review process. This ministry seeks input from various other 
ministries, including the Ministry of Defense, and issues an approval 
or denial based on the input of all government reviewers. Failure to 
apply for a national security review when required can result in 
criminal and civil penalties. If investors are unsure whether the 
proposed investment is subject to review they may request an opinion 
from the Ministry of Economy, Finance, and Employment. The ministry has 
2 months to respond to the investor. However, the decree notes that a 
lack of response on the part of the ministry within the specified time 
frame does not release the investor from the review requirement. 

The decree states that a review of an investment within a sensitive 
sector must be conducted if the investor will: 

* acquire "control" of a firm whose corporate headquarters are located 
in France,[Footnote 44] 

* acquire a branch of a firm whose corporate headquarters are located 
in France, or: 

* acquire more than one-third of the capital or voting rights of a firm 
whose corporate headquarters are located in France. 

These conditions apply to investment from a non-EU company. Investment 
from a company that is based in the EU is subject to review when 
investing within a sensitive sector in France only when meeting one of 
the first two conditions above for the last four sectors listed below, 
and only when meeting the second condition for the first seven sectors 
of the list. 

The decree defines the following sectors/activities as sensitive for 
purposes of a national security review: 

1. gambling and casinos; 

2. private security; 

3. research, development, or production of means to stem the unlawful 
use, in terrorist activities, of pathogens or toxins; 

4. equipment designed to intercept correspondence and monitor 
conversations; 

5. testing and certification of the security of information technology 
products and systems; 

6. production of goods or supply or services to ensure the security of 
the information systems; 

7. dual-use items and technologies;[Footnote 45] 

8. cryptology equipment and services; 

9. activities carried out by firms entrusted with national defense 
secrets, in particular under the terms of national defense contracts or 
of security clauses; 

10. research, production, or trade in weapons, ammunitions, powders, 
and explosives intended for military purposes or war materials; 

11. activities carried out by firms holding a contract for the design 
or supply of equipment for the Ministry of Defense, either directly or 
as subcontractors, to produce an item or supply a service for one of 
the sectors referred to in points 7 through 10 above. 

Companies based in an EU member state are subject to the same scope of 
sectors/activities for 8 through 11 above as a non-EU state, but a more 
refined scope for sectors/activities 1 through 7 above. 

The investor is asked to provide: 

* the location where the investor is a legal entity; 

* details on the individuals and public legal entities that have 
ultimate control over the investing organization; 

* the identity of the primary known shareholders holding more than 5 
percent of the capital or voting rights; 

* the board members' names and addresses; 

* if the investor is an investment fund, the identity of the fund 
manager(s); 

* the investment target's business activity; 

* the investment target's last fiscal year revenues; and: 

* the shareholder structure before and after the contemplated deal. 

If the Ministry of Economy, Finance, and Employment does not complete 
its review and respond within 2 months, then the transaction is 
considered to be automatically approved. However, the 2-month time 
frame only begins once a complete application is submitted. If more 
information from the investor is needed, the review period can be 
extended. According to French government officials, the Ministry of 
Economy, Finance, and Employment maintains an open dialogue with the 
investor so that the ministries reviewing a transaction can be assured 
of a complete understanding of the proposal. According to French 
government officials, during the approval procedure, informal 
consultations between the investor and the French government may take 
place. During this informal consultation, the investor may revise the 
proposal to obtain approval. 

The decree states that the Ministry of Economy, Finance, and Employment 
may determine whether security concerns can be mitigated by attaching 
one or more conditions to the approval of a transaction. For example, 
according to French officials, the government might require that the 
investor commit to fulfill ongoing contracts or obligations of the 
target firm, particular sensitive technologies be kept within France, 
or aspects of a company's business that require the use of classified 
information be limited to French citizens. Half of the cases reviewed 
in 2006 included mitigation agreements. According to government 
officials, it is common to require the investor to submit an annual 
report to the government confirming adherence to the agreement. 
Depending on the sector involved, the ministry with industry 
jurisdiction oversees the enforcement of commitments by the investor. 

In the event that the Ministry of Economy, Finance, and Employment does 
not approve the transaction, the investor has the right under French 
law to appeal the decision in the French administrative courts. If the 
investor can demonstrate that the ministry failed to apply French law 
correctly, the negative decision may be overturned. In addition, the 
investor could challenge the decision before the European Court of 
Justice if EC Treaty provisions are thought to have been violated. 
According to French government officials, there has never been a 
denial, and consequently, there have been no appeals under the decree 
since it was promulgated in December 2005. 

According to lawyers experienced with foreign investment policies in 
France, an important part of the application process for businesses is 
regularly following up with the Ministry of Economy, Finance, and 
Employment to check on the status of the application as it works its 
way through the review process. In a particularly sensitive deal, the 
investor is likely to hire advisers to contact the government to 
determine the likelihood of approval even before submitting an 
application for review. Lawyers and French government officials both 
stated that as a result of the explicitness of the decree, the French 
system is deemed to be relatively predictable and transparent for 
businesses because it is clear in the decree what is subject to review. 
U.S. government officials told us that they have not received any major 
complaints from U.S. businesses about French foreign investment 
policies or review procedures. 

Other Foreign Investment Laws and Policies: 

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

Recent Developments: 

According to a senior French government official, France is not 
philosophically opposed to foreign investment by foreign state-owned 
enterprises. However, it is informally considered in the investment 
review process. For example, the percentage of the investor that is 
owned by a foreign government would be taken into consideration. 
However, France does not have any laws or policies that specifically 
restrict state-owned enterprises or sovereign wealth funds from 
investing in France. 

A growing concern in France is related to energy infrastructure 
security. For example, in June 2007 the French Parliament issued a 
report stating that the French government should consider whether 
energy should be added to the list of sectors in the decree that 
require government review and approval. As of February 2008, there was 
no legislation being discussed that provides for such an addition to 
the decree. A senior French government official also noted that while 
the use of French government golden shares is not targeted at foreign 
investors, the French government could use such a share to oppose any 
measure that might jeopardize the security of energy supplies--- 
potentially including the purchase of French energy infrastructure by 
foreign state-owned enterprises, private hedge funds, or sovereign 
wealth funds. 

[End of section] 

Appendix VII: Germany: 

Figure: Foreign Investment in Germany (stocks and flows 2000-2006), 
U.S. dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $275; 
Flow: $200. 

Year: 2001; 
Stock: $275; 
Flow: $20. 

Year: 2002; 
Stock: $300; 
Flow: $40. 

Year: 2003; 
Stock: $400; 
Flow: $20. 

Year: 2004; 
Stock: $400; 
Flow: -$5. 

Year: 2005; 
Stock: $550; 
Flow: $20. 

Year: 2006; 
Stock: $480; 
Flow: $20. 

Source: United Nations (data). 

[End of figure] 

* Germany ranked fourth in terms of the average value of FDI inflows 
worldwide between 2000 and 2006. 

* In 2006, FDI in Germany totaled $502.4 billion, an increase of 85 
percent over FDI stock in Germany in 2000. 

* FDI stock in Germany as a proportion of GDP was 17.4 percent in 2006. 

* The United States is the third largest investor in Germany. 

Background: 

Germany, as a member of the European Union, is subject to the European 
Community Treaty, including the requirement that EU member states allow 
the free movement of capital. EU members must also allow investors from 
other countries to conduct business within the member state 
unencumbered.[Footnote 46] However, under the EC Treaty, EU member 
states retain the right to impose restrictions on the free movement of 
capital based on public security considerations, but these restrictions 
must not result in arbitrary discrimination or a disguised restriction 
in trade.[Footnote 47] 

Foreign Investment Laws and Policies: 

In Germany, as a general rule, foreign investment is not restricted by 
the government. However, in 2004 Germany enacted Section 7 of the 
German Foreign Trade and Payments Act, which established exceptions to 
the free movement of foreign investment into Germany for the 
"protection of security and external interests." Specifically, foreign 
investment may be restricted to guarantee the essential security 
interests of the Federal Republic of Germany,[Footnote 48] prevent a 
disturbance of the peaceful coexistence between nations, or prevent a 
major disruption of the foreign relations of the Federal Republic of 
Germany.[Footnote 49] The act specifies that foreign investment 
transactions are subject to review if the transaction involves a German 
company that produces or develops war weapons and other military 
equipment, or produces cryptographic systems for the transmission of 
classified information. 

German government officials told us that the catalyst for the 2004 
amendments was the 2003 purchase of a majority stake in a German 
submarine manufacturer by a U.S. private equity investment 
firm.[Footnote 50] According to these officials, there was uncertainty 
whether existing German export control laws were adequate to protect 
German national security interests, and the government did not posses 
the legal means to block such transactions. For example, the German 
government feared that a foreign company could purchase a German 
company possessing sensitive technologies, after which the investor 
could take the sensitive technology out of Germany and out of the 
purview of German export control laws. 

After passage of the 2004 amendments to the act, the Federal Ministry 
of Economics and Technology issued implementing regulations specifying 
which transactions were subject to review. These included the 
acquisition of German companies, or the direct participation in such 
companies, that produce or develop items specified in Germany's War 
Weapons Control Act, such as: 

* missiles and rockets; 

* combat aircraft and helicopters; 

* vessels of war and special naval equipment; 

* combat vehicles; 

* barrel weapons (guns, cannons, howitzers, mortars, etc.) 

* light anti-tank weapons, military flame throwers, mine laying and 
throwing devices; 

* torpedoes, mines, bombs, explosives, etc; 

* related accessory and ancillary items; and: 

* laser weapons. 

Acquisitions of companies that produce certain cryptographic systems 
are also subject to review under the implementing regulations of 
Section 7 of the act. Further, in September 2005, the German government 
added acquisitions of specialized engine and gear manufacturers to the 
list.[Footnote 51] According to lawyers experienced with foreign 
investment policies in Germany, this change occurred in response to the 
proposed sale of a German defense firm. 

Review Process: 

The review of foreign investment in Germany is conducted by the Federal 
Ministry of Economics and Technology, which obtains input from the 
Ministry of Defense and the Ministry of Foreign Affairs, among others, 
on whether there are national security concerns. If the transaction 
involves a cryptography company, for example, the Ministry of the 
Interior and German intelligence services would also be involved with 
the review. The ministry may prohibit a given acquisition if the 
reviewing officials determine that there would be an essential security 
interest at stake if the transaction were to be allowed. According to 
German government officials, in general, approval is a consensus 
decision. 

Non-German companies, as well as German companies in which a foreigner 
holds at least 25 percent of the voting rights, are subject to review 
if they are seeking to invest in one of the specified sectors and they 
are seeking to acquire a 25 percent or greater stake in the German 
company. If these criteria are met, the investor should report the 
transaction to the Federal Ministry of Economics and Technology. The 
investor submits a range of information about both the investor and the 
target company, including the following: 

* proof of the businesses' legal domicile; 

* whether the target company has classified information; 

* a description of the business operations that fall under the War 
Weapons List, or cryptographic products; 

* the companies' financial statements for the prior 3 years; 

* the number of shares held, directly or indirectly, in the target 
company; 

* a description of stakeholders in the companies who hold more than a 
25 percent stake; 

* a listing of the major suppliers and customers of the target company 
for the prior 3 years; and: 

* a breakdown of the companies' market share in war weapons in the 
German market, in the EU market, and when known in the markets of non- 
EU countries. 

Reporting foreign investment transactions to the German government is 
required. An investor's failure to notify the government may generate a 
fine and may be considered a criminal offense. German government 
officials noted that it is possible that a foreign investor could 
invest in Germany without obtaining ministry approval by not reporting 
the transaction. However, according to German government officials, 
companies commonly approach the Federal Ministry of Economics and 
Technology prior to formal application to gauge whether a given 
transaction is likely to be approved. 

Under the act, the German government has 1 month to reach a decision 
after submission of a complete application to the Federal Ministry of 
Economics and Technology. Absent a decision, the transaction is 
automatically valid after the 1-month period. According to German 
government officials, they have not had problems completing a review 
within 1 month. Since the end of July 2004, when the new rules under 
the Foreign Trade and Payments Act for reviewing foreign investment 
came into effect, a total of 11 acquisitions have been reported for 
review. 

The regulations do not permit government-imposed conditions on 
approval. However, according to German government officials, during the 
review process the ministry stays in contact with the applicant 
regarding any concerns or issues. If such issues are identified, the 
applicant can agree to make changes to the business arrangements 
outlined in its notification materials to facilitate an approval. 

If the Federal Ministry of Economics and Technology were to deny an 
application, the decision can be appealed through an administrative 
process within the German legal system. To date, there have been no 
denials and, consequently, no appeals. 

According to German government officials, about 50 companies constitute 
the core of the German defense industrial base. If an acquisition were 
attempted in relation to these companies, the investor would apply to 
the ministry to obtain approval. These officials estimated that roughly 
800 companies in Germany could require approval for a foreign merger or 
acquisition on national security grounds if the German government were 
to extend the review requirement to all defense-related companies. The 
law currently does not include dual use items. 

Other Foreign Investment Laws and Policies: 

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

[End of section] 

Appendix VIII: India: 

Figure: Foreign Investment in India (stocks and flows 2000-2006), U.S. 
dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $18; 
Flow: $3. 

Year: 2001; 
Stock: $20; 
Flow: $5. 

Year: 2002; 
Stock: $25; 
Flow: $5. 

Year: 2003; 
Stock: $30
Flow: $3. 

Year: 2004; 
Stock: $40; 
Flow: $4. 

Year: 2005; 
Stock: $43; 
Flow: $5. 

Year: 2006; 
Stock: $50; 
Flow: $10. 

Source: United Nations (data). 

[End of figure] 

* India ranked 25th in terms of the average value of FDI inflows 
worldwide between 2000 and 2006. 

* In 2006, FDI in India totaled $50.7 billion, an increase of $33.2 
billion over FDI stock in India in 2000. 

* FDI stock in India as a proportion of GDP was 5.7 percent in 2006. 

* India posted an average growth rate of more than 7 percent in the 
decade between 1996 and 2006. 

Background: 

When India gained independence from British rule in 1947, the country 
welcomed foreign investment to establish a technology base as well as 
skills in entrepreneurship. In 1973, the Foreign Exchange Regulation 
Act (FERA) imposed a ceiling of 40 percent in foreign investment equity 
in Indian companies, leading to a flight of foreign investors. In the 
mid-1980s, India reversed course and began liberalizing its economy, 
including removing various restrictions on foreign investment. Further 
liberalization followed the announcement of a new Industrial Policy in 
July 1991. The Reserve Bank of India automatically approved foreign 
investment in industries designated by the government as priority 
recipients of investment. The Foreign Exchange Management Act of 1999 
replaced FERA and removed restrictions on foreign corporations. 
Further, policies on licensing were liberalized. 

While India has liberalized its foreign investment policy substantially 
since 1991, according to an Indian government official, the most 
important liberalization has occurred in domestic investment brought on 
by the privatization of the Indian economy. As the government continues 
to privatize state-owned sectors such as ports and energy production, 
India would like to attract both domestic and foreign private 
investment. 

Foreign Investment Laws and Policies: 

The Foreign Exchange Management Act (FEMA) is one of the primary laws 
regulating foreign investment in India.[Footnote 52] FEMA broadly 
regulates the foreign exchange market and provides the Indian 
government the legal authority to restrict foreign investment. Because 
FEMA does not include implementing regulations, Indian foreign 
investment policy is primarily established through a series of public 
notices or "Press Notes" issued separately for each sector. Press Notes 
are usually approved by the government cabinet and released by the 
Department of Industrial Policy and Promotion (DIPP), a department 
within the Ministry of Commerce and Industry. DIPP makes all Press 
Notes publicly available and has published a comprehensive summary of 
the individual Press Notes. 

The Press Notes establish, among other things, whether investments in 
each individual sector must receive government approval or whether 
investments fall under the "automatic route," which does not require 
government approval. The Foreign Investment Promotion Board (FIPB) is 
an interagency body with the authority to approve investment 
transactions. Any proposed investment that requires government approval 
must receive approval from the FIPB before the transaction can be 
completed. In addition to investments in sectors specifically listed as 
requiring approval by the Press Notes, an investment must receive 
government approval if (1) the activity requires an industrial license, 
(2) the investment is in the financial sector or is subject to the 
Securities and Exchange Board, (3) the investor has an existing joint 
venture in India in the same field, or (4) the investment falls outside 
of ownership caps or in sectors in which foreign investment is 
prohibited. Investment that receives FIPB approval is granted the 
general permission of the Reserve Bank of India, which administers 
FEMA, without a separate approval process. 

The Press Notes also establish the percentage of a company that can be 
owned by a foreign investor in each sector. Foreign ownership caps are 
usually set at one of the following levels: zero percent (prohibited), 
26 percent (allowing the foreign investor a sufficient share to block 
major decisions), 49 percent (maintaining that a majority of shares are 
held by Indian nationals), 74 percent (maintaining that Indian 
nationals hold a sufficient share to block major decisions), or 100 
percent (completely open). The reasons for the limits on foreign 
ownership vary from sector to sector. However, according to an Indian 
government official, domestic and economic concerns, such as the effect 
on Indian businesses, contribute to the restrictions. In some 
industries with primarily domestic concerns, such as retail trade, 
foreign investment is prohibited. However, it is allowed, within 
limits, in the defense industry, which is commonly associated with 
national security concerns. 

The following are examples of sector-based ownership caps on foreign 
investment in India.[Footnote 53] 

Foreign investment is prohibited in: 

* retail trades (except single-brand retail), 

* atomic energy, 

* lotteries, 

* gambling and betting, 

* housing and real-estate business,[Footnote 54] 

* certain types of agriculture. 

Limited to 26 percent in (among others): 

* defense industries, 

* print media, 

* insurance. 

Limited to 49 percent in (among others): 

* broadcasting, 

* domestic airlines, 

* infrastructure/service sectors. 

Limited to 74 percent in (among others): 

* establishment and operation of satellites, 

* atomic minerals, 

* exploration and mining of coal. 

Allowed up to 100 percent in other sectors, including: 

* development of airports, 

* private oil refineries, 

* nonatomic electricity generation, 

* roads and highways. 

Ownership caps are independent of government approval requirements. For 
example, a sector open to 100 percent foreign ownership may still 
require government approval, while a sector capped at 49 percent may be 
open through the automatic route. There are no stated monetary 
thresholds that trigger a review of foreign investment, except for 
certain currency transactions, which must be reviewed by the Reserve 
Bank of India at various thresholds. 

Foreign investors under the automatic route are only required to notify 
the Reserve Bank of India within 30 days of completing the transaction. 
According to a government official, the notification information is 
primarily for statistical purposes. All foreign investment transactions 
require notification, regardless of value or equity percentage, 
although according to a government official, there are no measures in 
place to ensure compliance with the notification requirement. According 
to an Indian government official, potentially harsh penalties for 
noncompliance deter investors from avoiding requirements. 

Some sectors have additional restrictions and approvals. The Industries 
(Development and Regulation) Act of 1951 currently requires industrial 
licenses for several sectors, including alcoholic drinks, tobacco, 
electronic aerospace and defense equipment, industrial explosives, and 
hazardous chemicals. An industrial license was also required for a 
manufacturing plant with capital of more than 10 million rupees 
(roughly $250,000) to produce any of the 114 items that are reserved 
for "small scale" producers (under 10 million rupees) as well as for 
any industrial project within 25 kilometers of any city with a 
population of 1 million or more as of the 1991 census. According to the 
U.S. State Department, the government of India recently reduced the 
number of small scale reservations from 114 to 35, part of an 
incremental reduction that is expected to continue. Investments in 
these sectors must receive an industrial license in addition to 
approval from the FIPB. 

In addition to the required FIPB review and approval for foreign 
investment, investment in the financial sector is subject to approval 
by the Reserve Bank of India. Guidelines for FIPB reviews state that 
for private sector banks, FIPB approval would be granted only after 
permission had been obtained, in principle, from the Reserve Bank. 
These guidelines are included in a document entitled Investing in 
India: a Comprehensive Manual for Foreign Direct Investment-Policy and 
Procedures, published by the Indian government. 

Foreign institutional investors such as mutual funds are regulated by 
the Securities and Exchange Board of India Act as well as under FEMA. 
While foreign nationals are not allowed to invest directly in the 
Indian stock market, foreign institutions that are regulated in their 
home country are allowed to invest, subject to certain rules, according 
to the Indian government. For example, no single foreign institutional 
investor can acquire more than 10 percent of an Indian company, and all 
foreign institutional investment cannot exceed 24 percent of the 
capital of the Indian company. Foreign institutional investors must 
also receive approval from the Reserve Bank in some instances, such as 
non-stock exchange sales and purchases. According to a law firm 
familiar with foreign investment policies in India, the Securities and 
Exchange Board of India regulations are much less demanding than those 
under the FIPB approval process. In 2006, India amended the Securities 
and Exchange Board of India regulations, expanding the list of entities 
considered foreign institutional investors, which are allowed to invest 
in the Indian stock market, to include governmental agencies such as 
sovereign wealth funds. 

Review Process: 

For those transactions that do not qualify for the automatic route, the 
FIPB has the authority to reject an investment transaction, and judges 
each proposal on a case-by-case basis. FIPB can reject a transaction 
based upon "special circumstances" or on factors it considers relevant, 
according to FIPB guidelines. While the guidelines emphasize FIPB's 
flexibility, they also offer nonbinding factors that FIPB should 
consider in a review. For example, FIPB should consider whether an 
investment has any strategic or defense-related considerations. 
However, the FIPB guidelines do not specify what would constitute a 
strategic or defense related consideration. An Indian government 
official stated that while an FIPB review could consider other factors, 
the primary focus of a review is to determine whether the proposed 
investment is compliant with Indian policy, such as sector equity caps, 
joint venture approval requirements, and industrial licensing 
requirements. According to an Indian government official, in most 
cases, FIPB denies approval only if a transaction is not compliant with 
Indian foreign investment policy requirements. 

The FIPB is composed of the Secretaries of the Department of Economic 
Affairs (the Chair), the Department of Industrial Policy and Promotion, 
the Department of Commerce, the Division of Economic Relations within 
the Ministry of External Affairs; and the Ministry of Overseas Indian 
Affairs. According to an Indian government official, the ministry with 
industry jurisdiction for each case contributes to the FIPB decisions. 
Guidelines suggest that applications submitted to specific ministries 
should be brought before the FIPB within 15 days of submission, and 
that government approval or rejection should be communicated within 30 
days. However, according to an Indian government official, an investor 
should plan on a 3-month review and approval process. Investors may 
file grievances or complaints to the Grievances Officer-cum-Joint 
Secretary within the DIPP or to the Business Ombudsman within the 
Ministry of Commerce and Industry. Once an investor has received 
approval through the FIPB, he or she is automatically granted the 
general permission of the Reserve Bank without additional review; 
however, the companies must notify the Reserve Bank within 30 days of 
receipt of inward remittances and within 30 days of the issue of shares 
to the foreign investors. 

According to a lawyer familiar with investment in India, FIPB approval 
is usually a legal formality, and FIPB denials are rare. FIPB does not 
place conditions upon approval. However, according to a U.S. State 
Department official, if the investment application requires 
modification, an investor is permitted to resubmit an amended 
investment application to the FIPB for approval. Proposals can also be 
deferred or referred to a different regulatory body. 

Government ministries can exert influence on investment transactions 
prior to the transaction entering the formal FIPB process. According to 
a U.S. State Department official, the Indian government has intervened 
in a number of cases where investors from countries of concern have 
attempted to invest in sectors deemed sensitive, such as the 
telecommunications sector, often through involvement from the ministry 
with industry jurisdiction on an ad hoc basis rather than through the 
formal process. Negotiations and informal discussions with the 
ministries occur before an investor submits an application to the FIPB, 
according to the U.S. State Department. Furthermore, some investment 
applications to the FIPB from investors in countries of concern have 
sat for over a year without approval or denial, according to a U.S. 
State Department official. 

New Developments: 

Indian foreign investment policy in individual sectors changes 
frequently. Each year, the Indian Cabinet reviews foreign investment 
policy and announces a series of sector-based changes as part of a 
government-wide FDI review, according to the U.S. State Department. In 
January 2008 the Indian government approved several changes to its FDI 
policy. The limit on foreign investment in state-owned petroleum 
refineries was increased from 26 to 49 percent. The limits in some 
parts of the civil aviation sector, including cargo airlines, were 
increased from 49 to 74 percent, although investment in passenger 
airlines is still limited to 49 percent. Additional liberalization of 
foreign investment rules was approved for construction development 
projects, commodity exchanges, credit information companies, industrial 
parks, and titanium mining. According to the U.S. State Department, the 
cabinet-approved policy, which was delayed several months, dropped the 
most controversial proposals to expand FDI in retail and other areas. 
Changes to individual sectors also can occur outside the annual foreign 
investment policy review, according to the U.S. State Department. For 
example, in April 2007, the government announced changes to the 
conditions of ownership in the telecommunications sector as a follow-up 
to changes made in March of 2005 that increased the telecommunications 
sector ownership cap from 49 percent to 74 percent. The 2007 changes 
introduced additional specific security conditions for the 
telecommunications industry, which, according to business association 
representatives, are intended to offset potential security concerns 
associated with increased foreign ownership in the sector. 

According to business representatives that have had experience 
investing in India, there have been no recent significant changes that 
have tightened controls on foreign investment or increased ownership 
restrictions. Indian government officials as well as representatives 
from a law firm with Indian investment experience stated that the trend 
of liberalization will continue in India. Despite a likely trend of 
liberalization in the long term, one of the most controversial areas 
for liberalization has been in the retail sector, where foreign 
investment is seen as a threat to small Indian retail businesses. 
According to the U.S. State Department, The Ministry of Commerce and 
Industry announced in October 2007 that liberalization in the retail 
sector would not occur as part of the ongoing foreign investment policy 
review. 

The Indian government has also recently considered implementing a 
security-based review process. According to the U.S. State Department, 
the Indian National Security Council Secretariat suggested creating a 
National Security Exception Act (NSEA), which would have established a 
process for assessing security threats related to foreign investment, 
similar to the U.S. CFIUS process. The idea met resistance from the 
Ministry of Commerce and Industry and the Ministry of Finance and was 
subsequently abandoned. The debate over the changes represents the 
institutional differences between agencies. The National Security 
Council Secretariat and the Ministry of Home Affairs would prefer to 
make security controls an explicit part of the formal process, while 
the Ministry of Commerce and Industry and the Ministry of Finance are 
concerned about the effect on investment that further review 
requirements might have, according to the U.S State Department. Since 
the initial proposal was abandoned, U.S. State Department officials 
have reported that Indian government agencies are still debating the 
need for a national security review of foreign investment. 

[End of section] 

Appendix IX: Japan: 

Figure: Foreign Investment in Japan (stocks and flows 2000-2006), U.S. 
dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $50; 
Flow: $8. 

Year: 2001; 
Stock: $50; 
Flow: $5. 

Year: 2002; 
Stock: $75; 
Flow: $8. 

Year: 2003; 
Stock: $90; 
Flow: $5. 

Year: 2004; 
Stock: $95; 
Flow: $5. 

Year: 2005; 
Stock: $100; 
Flow: $0. 

Year: 2006; 
Stock: $105; 
Flow: -$5. 

Source: United Nations (data). 

[End of figure] 

* Japan ranked 37th in terms of the average value of FDI inflows 
worldwide between 2000 and 2006. 

* In 2006, FDI in Japan totaled $107.6 billion, an increase of $57.3 
billion over FDI stock in Japan in 2000. 

* Japan is ranked 21st in the world in terms of FDI stock as of 2006. 

* FDI stock in Japan as a proportion of GDP was 2.5 percent in 2006. 

Background: 

Japan possesses the third largest economy in the world. However, 
foreign investment is significantly less in Japan than for other large 
economies. In 2003, the Japanese government set a national goal of 
doubling the nation's stock of foreign investment from its 2001 level 
by the end of 2006. In March 2006, the Japanese government set an 
updated goal that has been officially adopted by the cabinet to 
increase foreign investment in Japan to 5 percent of the country's GDP 
by 2010. 

Trends of foreign investment in the Japanese economy are best 
understood within the historical context of the Japanese recovery after 
World War II, according to an academic familiar with the Japanese 
economy. Whereas countries such as West Germany and France emerged from 
the war and took measures to attract foreign capital to rebuild, Japan 
has historically had a surplus of capital and therefore little need to 
attract foreign investment, according to a consultant on Japanese 
financial and trade-related issues. Japan enacted the Foreign Exchange 
and Foreign Trade Act (FEFTA) in 1949, which, according to an academic, 
barred foreign companies from repatriating profits from Japan, 
effectively prohibiting all but a few cases of foreign investment. This 
continued until 1967, at which time Japan was required to open its 
economy to foreign investment to become a member of the OECD. Japan 
further changed its laws in 1991, by amending the Foreign Exchange and 
Foreign Trade Act, which today remains the primary law relevant to FDI. 
However, despite changes in the law, foreign investment did not 
increase substantially until the economic downturn in the late 1990s; 
this increase in foreign investment is the result of bankrupt companies 
seeking foreign investors in order to stay afloat, according to U.S. 
State Department officials and representatives from the private sector 
and academia. 

Officials also offered multiple explanations for why foreign investment 
in Japan has been low. One explanation is that foreign acquisitions of 
Japanese companies face barriers caused by business practices such as 
cross-shareholding--the practice of companies holding shares of each 
other's stock--and keiretsu relationships--groups of affiliated 
companies that hold each other's shares and may also have financial 
(such as bank loans) or manufacturer-supplier ties or distributor 
relationships. Cross-shareholding and keiretsu relationships lessen the 
amount of shares available on the stock market. In addition, cross- 
shareholding may prevent a foreign company from taking management 
control of a company, even if the foreign company is the largest 
individual shareholder. The Japanese government notes that keiretsu 
relationships and cross-shareholding have become less common than they 
were in the past. Another explanation is that Japanese businesses are 
averse to foreign investment. One reason for that is because Japan 
possesses a system of guaranteed lifetime employment, which has led 
Japanese business managers to place a greater value on internal 
corporate loyalty than shareholder returns, according to the U.S. State 
Department. Many Japanese companies believe that foreign investors, 
especially private equity firms, will harm a Japanese company's long- 
term business interests solely to increase short-term profits, 
according to an academic and private sector representatives. 

In addition to a business environment generally averse to foreign 
investment, companies have increasingly instituted corporate defensive 
measures to prevent hostile takeovers by both foreign and domestic 
companies as a response to revisions of Japan's Corporate Code that 
expanded the types of merger and acquisition transactions allowable in 
Japan. Defensive measures such as "poison pills" allow a corporation to 
prevent a hostile takeover at the cost of diluting the value of all 
shareholders' holdings. In May 2005, the Japanese government released 
guidance on how to appropriately implement defensive measures. As of 
May 2007, about 340 companies in Japan had instituted such defensive 
measures. In at least one case, the Japanese courts have upheld the 
right of a Japanese firm to prevent a foreign acquisition using 
defensive measures, according to industry association representatives. 

Since the 1990s, acceptance of foreign investment has increased, 
although high-profile cases have fueled a fear of foreign investment, 
according to U.S. government officials. In the economic recession in 
the 1990s, Japanese companies in financial distress needed foreign 
investors to prevent bankruptcy, according to an academic. In fact, 
foreign investment mergers and acquisitions in Japan have typically 
occurred only when the Japanese company is in financial distress, 
according to a business association representative. While there have 
been successful transactions that have benefited the investor and the 
Japanese company, some foreign investment transactions have been viewed 
as harmful to Japan, according to an academic familiar with the 
Japanese economy. One such case involves a foreign private equity 
firm's acquisition of a bank and subsequent large initial public 
offering (IPO) for the private equity firm. This company forced another 
Japanese company to declare bankruptcy while producing a large profit 
for itself, a fact that contributed to the view that foreign firms do 
not share Japanese interests. 

Foreign Investment Laws and Policies: 

Japan's primary law concerning foreign investment, is the Foreign 
Exchange and Foreign Trade Act.[Footnote 55] The law provides that 
government ministries may prohibit or place conditions on a proposed 
foreign investment if they determine that it may harm national 
security, public order, public safety, or the smooth management of the 
economy. However, the Japanese government has not used this authority 
since FEFTA was amended in 1991, according to the Japanese government. 

The Japanese regulatory scheme established under FEFTA treats foreign 
investment differently based upon the sector in which the investment is 
taking place, among other criteria. Foreign investment in a sector that 
is determined to be sensitive requires prior notification and 
government approval, while investment in other sectors only requires an 
after-the-fact notification to the government. Foreign investment in 
all industries requires notification through one of these routes. A 
government notice provides tables that specify the sectors and the 
individual industries that require prior and after-the-fact 
notification. Industries not listed in either table must submit prior 
notification. Failure to notify, among other violations under FEFTA, 
can result in criminal penalties including jail for up to 3 years and/ 
or a fine of three times the investment amount or 1 million yen, 
whichever is larger. 

According to the Japanese government, prior notification of a foreign 
investment is required for: 

* national security: aircraft, weapons, nuclear power, spacecraft, and 
gunpowder; 

* public order: electricity, gas, heat supply, communications, 
broadcasting, water, railroads, passenger transport; 

* public safety: biological chemicals, guard services; and: 

* smooth management of the economy: primary industries relating to 
agriculture, forestry and fisheries, oil, leather and leather products 
manufacturing, air transport, and maritime transport. (These areas are 
reserved under Article 2 of the OECD Code of Liberalization of Capital 
Movements.) 

Prior notification is also required in additional circumstances. The 
Japanese government requires prior notification for investments from 
countries with which Japan has not completed a reciprocal investment 
agreement [Footnote 56] and if the foreign investment involves certain 
capital transactions subject to permission by the Finance 
Minister.[Footnote 57] If there is doubt as to whether a company is 
subject to prior notification, administrative agencies will provide an 
advance consultation outside of the formal review process. 

On September 28, 2007, a Japanese Cabinet Ordinance came into effect, 
requiring that industries for dual use items and items used for the 
maintenance of the defense industrial base provide prior notification 
for foreign investment. These changes were based on recommendations of 
a study group convened by the Ministry for Economy, Trade, and Industry 
(METI), according to the Japanese government. The change was intended 
to prevent the outflow of technology, especially that which has a high 
probability of conversion to use in weapons of mass destruction, and 
maintain the domestic defense industrial base. The revisions include a 
list of all specific industries and items that fall under the new prior 
notification requirements, including industries involved in making 
accessories or components related to the manufacture of arms, aircraft, 
satellites, and nuclear reactors. Additionally, manufacturers making 
testing equipment, repair equipment, and certain types of software 
usable in weapons and airplanes will fall under prior notification 
requirements. 

According to the Japanese government, the review of foreign investment 
regulations was initiated because of the changed security environment 
surrounding Japan and trends in international investment activity. This 
was the first review of foreign investment regulations in 16 years, 
since FEFTA was amended in 1991. While there was no single triggering 
event for these changes, there were several controversial investments, 
both domestic and foreign, that have raised public concern with mergers 
and acquisitions over time, according to U.S. State Department and 
industry association representatives. 

A foreign investor in sectors that require after the fact reporting 
must file a report with the Ministry of Finance and the ministry with 
jurisdiction over the industry through the Bank of Japan within 15 days 
after a transaction occurs. In previous interviews with Japanese 
government officials, GAO was told that this reporting was for 
statistical purposes and in case of an emergency, such as a financial 
crisis or war.[Footnote 58] 

FEFTA broadly defines "foreign investment" as the (1) acquisition of at 
least 10 percent foreign ownership of shares in a company listed on a 
Japanese stock exchange; (2) acquisition of any shares in an unlisted 
company; (3) establishment of a branch, factory, or other business 
office in Japan; (4) consent given to change the corporate objectives 
of a domestic company with one-third or more foreign ownership; or (5) 
loan of certain types and amounts of money to domestic companies. 

In addition to adding industries subject to prior notification and 
review, the September 2007 Cabinet Ordinance made several other 
changes. It expanded the scope of FEFTA to include investment in a 
parent company when a subsidiary falls under a sector that is subject 
to review and provided clarification on the percentages of foreign 
ownership that fall under the regulations. If more than 50 percent of a 
company is controlled by foreigners, but no single foreign investor 
owns more than a 10 percent share, that investment will not fall under 
FEFTA regulations. However, if 10 percent of the company is owned among 
separate investors that have agreed to collectively exercise their 
voting rights, the investment will be subject to FEFTA regulations. 
Also, the ministries can request detailed information from the foreign 
investors and the target company; under previous regulations, such 
information was available only if the investor supplied it voluntarily. 

In addition to the review process implemented under FEFTA, there are 
specific restrictions to other sectors. According to OECD, foreigners 
or foreign-controlled enterprises are not granted licenses in the 
broadcasting sector (except cable television and broadcast on 
telecommunications services) under the Radio Law and Broadcast Law, 
which were both passed in 1950. Similarly, the 1984 Law Concerning 
Nippon Telegraph and Telephone Corporation requires that board members 
and auditors of the Nippon Telegraph and Telephone Corporation have 
Japanese nationality. Also, the Japanese government is obligated to 
hold stocks in Japan Tobacco Inc. 

Review Process: 

FEFTA authorizes the Ministry of Finance and the ministry with industry 
area jurisdiction to review investments that are required to provide 
prior notification. The notification form requires information on the 
percentage of shares to be acquired, the business plan of the investing 
company, and the reason for the transaction. However, the ministries 
may also consider information related to foreign control, such as the 
number of foreign board members and the foreign company's reputation, 
according to Japanese government officials. The ministries review 
investments on a case-by-case basis. While threats to national 
security, public order, public safety, or the economy are factors 
considered in a review, specific criteria used to determine when an 
investment poses a significant threat are not published. 

The ministries have 30 days to review a proposed investment after a 
foreign company has notified the ministries of its intent to invest. If 
the investor has not received a response within that time, the 
transaction is automatically approved, according to METI officials. The 
ministries may extend the review period up to 4 months if they believe 
further inquiry is necessary. A Committee on Foreign Exchange and Other 
Transactions also may extend the review period an additional month. 
However, the Japanese government noted that reviews can be, and 
frequently are, shortened to 14 days. Japanese law provides for a 
public hearing if an investor wishes to contest the result of the 
ministerial review. After the public hearing, an investor may submit an 
administrative appeal to overturn the decision and if the appeal is 
rejected, an investor can then request the court to overturn the 
decision. 

[End of section] 

Appendix X: The Netherlands: 

Figure: Foreign Investment in The Netherlands (stocks and flows 2000-
2006), U.S. dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $240; 
Flow: $50. 

Year: 2001; 
Stock: $270; 
Flow: $40. 

Year: 2002; 
Stock: $340; 
Flow: $10. 

Year: 2003; 
Stock: $420; 
Flow: $10. 

Year: 2004; 
Stock: $450; 
Flow: $0. 

Year: 2005; 
Stock: $420; 
Flow: $20. 

Year: 2006; 
Stock: $425; 
Flow: $0. 

Source: United Nations (data). 

[End of figure] 

* The Netherlands ranked eighth in terms of the average value of FDI 
inflows worldwide between 2000 and 2006. 

* In 2006, FDI in the Netherlands totaled $451.5 billion, an increase 
of 85 percent over FDI stock in 2000. 

* FDI stock in the Netherlands as a proportion of GDP was 68.2 percent 
in 2006. 

Background: 

The Netherlands' trade and investment policies are among the most 
liberal in the world. As a founding member of the EU and the home of 
the International Court of Justice, the Netherlands has historically 
emphasized the development of international institutions and maintains 
an economy with a strong international focus. The Netherlands 
Constitution is one of only two constitutions in the world to include a 
provision requiring the government to further international 
institutions and the rule of law.[Footnote 59] According to lawyers 
familiar with foreign investment policies in the Netherlands, there 
were a series of significant changes in Dutch corporate law in the 
1980s that favored corporate shareholders. The changes were largely 
reactions to the broad social policies of the 1960s and 1970s. These 
revisions to the law, combined with the fact that the Netherlands has a 
highly educated population, have made the country a prime target of 
investment over the past several decades. Foreign companies established 
in the Netherlands account for roughly one-third of industrial 
production and employment. 

Foreign Investment Laws and Policies: 

The Netherlands possesses no review process for foreign investment, and 
according to Dutch government officials, the Netherlands lacks the 
general authority to block investment. Foreign and domestic companies 
are treated equally under Dutch law, and regulations for mergers and 
acquisitions apply to domestic as well as foreign investment, according 
to Dutch government officials.[Footnote 60] Foreign investment, like 
domestic investment, must go through an anti-trust review. However, 
these reviews do not provide the Dutch government the authority to 
block investment upon national security grounds, according to 
government officials. The one exception is in the financial sector, in 
which the Netherlands Central Bank, and in some cases the Finance 
Minister, can block mergers and acquisitions. 

The Financial Supervision Act establishes the authority for the 
Netherlands Central Bank to review and grant approval to all mergers 
and acquisitions involving Dutch companies in the financial sector, 
including banks, management companies for collective investments, 
investment firms, and insurance companies. For a transaction involving 
one of the five largest banks in the Netherlands, the transaction must 
receive approval from the Ministry of Finance. When a company acquires 
at least 10 percent ownership of a Dutch company, the investor must 
apply to the Netherlands Central Bank to receive a "declaration of no 
objection." According to Dutch government officials, this application 
can be submitted after a transaction has been completed. The 
Netherlands Central Bank performs a review of the transaction and 
decides whether or not to issue a declaration of no objection. In the 
case of the five largest banks, the Netherlands Central Bank makes a 
recommendation to the Finance Minister, who has the authority to issue 
the declaration of no objection. The Netherlands Central Bank or the 
Finance Minister can effectively block a transaction by refusing to 
issue this declaration. The Bank or Finance Minister has 3 months from 
the date of application to render a decision. 

The review and approval process in the financial sector is primarily 
intended to determine whether any financial mergers or takeovers would 
lead to undesirable developments in the Dutch financial sector. 
According to Dutch government officials, the process is not generally 
treated as a review or approval process at all; rather, it is a 
contractual agreement whereby acceptable conditions of the merger are 
established. However, the Financial Supervision Act states that the 
government of the Netherlands has the authority to provide "prudential 
supervision" of mergers, and according to a Dutch law firm with 
experience facilitating investment in the Netherlands, this review 
provides a general discretionary authority to deny transactions so long 
as a decision is supported on reasonable grounds. According to the law 
firm, if there is a threat to national security, the Netherlands 
Central Bank or the Finance Minister could block a transaction using 
this authority. According to Dutch government officials, a situation in 
which foreign transactions could be blocked would be if there was 
spillover from U.S. sanctions. For example, investment from businesses 
in countries such as Venezuela and Iran may be determined to harm the 
functioning of the Dutch market and could thus be blocked. 

Restricted Sectors: 

Certain sectors are publicly owned and controlled, and are therefore 
closed to foreign investment. According to a Dutch government official, 
public monopolies exist in the following instances: 

* A state-owned enterprise owns and administers the national high- 
voltage electricity grid. However, electricity production and 
distribution are open to foreign investment. 

* Water grids are locally held monopolies. While some water grids have 
been privatized to foreign entities, new legislation passed in 2004 
prevents further privatization. According to Dutch government 
officials, water is maintained by the government primarily due to 
health concerns. 

* Railway passenger services are controlled by a state-owned enterprise 
and are effectively closed to investment. 

* The national airport is currently closed to investment. While 
privatization has been discussed for years, the current government has 
decided not to privatize the airport. 

* The Netherlands Central Bank is a monopoly and is closed to 
investment. 

* Postal service below 50 grams per letter is closed to investment. 
This monopoly is still in place, but is slated to be abolished by 
December 31, 2010, as part of a decision to abolish this monopoly in 
most of the European Union nations. 

* Public bus transport is generally open to foreign investment, 
although within some cities, the bus lines are owned by the local 
government. 

Dutch government officials generally cited maintaining a competitive 
market as a reason why these sectors are closed to investment. Dutch 
government officials noted that privatizing sectors where there is a 
monopoly would present a threat to open competition in the market. 
However, Dutch government officials also cited other reasons for the 
government maintaining control of sectors, such as the fact that the 
water grids could present a health issue if not properly maintained. 
All of the listed restrictions fall under the transportation, water 
supply, energy, or banking sectors, which are considered part of 
"critical infrastructure" by U.S. government sources. According to a 
U.S. State Department official, one reason these sectors are protected 
in the Netherlands is that they are perceived by the Dutch to be vital 
to their security interests. 

The Netherlands has imposed nationality requirements in the air 
transport industry. European Union law requires that an airline 
registered and licensed in the Netherlands must be majority owned and 
controlled by EU nationals. In 2004, an airline from another EU member 
state acquired the Dutch national airline and maintains a majority 
share in the combined company. Despite the fact that the partner 
investor is another European airline, the Netherlands recently renewed 
the right to dilute shares to acquire 50.1 percent of voting rights in 
the case that another nation terminates or restricts an international 
route because the airline is not effectively controlled by Dutch 
nationals. 

New Developments: 

The Netherlands currently has no plans to change its laws for managing 
foreign investment, according to U.S. State Department officials. 
However, some members of the Dutch government have argued that changes 
should be made. High-profile transactions have raised concerns with 
foreign investment among certain factions in the Netherlands. According 
to U.S. State Department officials, the debate about whether the 
Netherlands should institute stricter controls on foreign investment 
was first raised with the acquisition of the Dutch national airline in 
2004. Some people believed that certain traditionally Dutch companies 
should stay in control of Dutch nationals, according to U.S. State 
Department officials. 

The negotiations involving the acquisition of a Dutch bank by foreign 
investors has reopened the debate concerning the protection of Dutch 
companies from foreign acquisitions. The terms of the acquisition of 
the bank by foreign investors were approved by the Ministry of Finance 
and were recently finalized. However, some members of Parliament have 
expressed concern about the transaction and announced a desire to 
debate both the specific transaction as well as potential changes to 
the entire regulatory scheme for granting approvals. While the 
Parliament has not intervened in the regulatory process, the Finance 
Committee within the Dutch Parliament planned to debate the bank 
transaction on October 17, 2007, and again on November 8, 2007. 
According to U.S. State Department officials, one change suggested by 
Dutch government officials has been to increase the role of the 
financial supervisor, effectively delegating a body within the 
government to oversee mergers and acquisitions. Another suggestion has 
been to reintroduce golden shares in certain domestic companies. Golden 
shares would grant the government veto rights over substantial changes 
to particular companies that have been determined to serve the public 
interest. The Netherlands divested its golden share in the national 
postal firm in 2006 after the European Court of Justice ruled that the 
golden share unduly restricted the free movement of capital.[Footnote 
61] 

The bank transaction also raised concerns about state-owned enterprises 
and sovereign wealth funds. A failed bidder for the Dutch bank was 
partially owned by a state-owned bank from China and a sovereign wealth 
fund from Singapore. Had the transaction been completed, a minority 
share of the Dutch bank would be indirectly owned by the Chinese and 
Singaporean governments. This fact, according to a Dutch law firm 
familiar with the transaction, concerned members of the Dutch 
Parliament and was one reason for calls for debate over the bank 
transaction. However, the Netherlands has typically not been opposed to 
investment from government-controlled investors, and according to Dutch 
government officials, there are already state-owned enterprises that 
have invested in companies in the Netherlands. 

[End of section] 

Appendix XI: Russia: 

Figure: Foreign Investment in Russia (stocks and flows 2000-2006), U.S. 
dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $30; 
Flow: $0. 

Year: 2001; 
Stock: $50; 
Flow: $0. 

Year: 2002; 
Stock: $70; 
Flow: $0. 

Year: 2003; 
Stock: $90; 
Flow: $5. 

Year: 2004; 
Stock: $115; 
Flow: $10. 

Year: 2005; 
Stock: $170; 
Flow: $8. 

Year: 2006; 
Stock: $190; 
Flow: $25. 

Source: United Nations (data). 

[End of figure] 

* Russia ranked 18th in terms of the average value of FDI inflows 
worldwide between 2000 and 2006. 

* In 2006, FDI in Russia totaled $197.7 billion, an increase of more 
than $165.5 billion over FDI stock in 2000. 

* FDI stock in Russia as a proportion of GDP was 20.2 percent in 2006. 

Background: 

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

Foreign Investment Laws and Policies: 

Under the 1999 Federal Law on Foreign Investments, the Russian 
government may block foreign investment to ensure the defense of the 
country and the security of the state. However, according to Russian 
government officials, no regulation or process was put in place to 
implement that section of the law. Two transactions with national 
security implications were attempted in 2004 and 2005. The Russian 
government reviewed the transactions using an ad hoc process in which 
the Federal Anti-Monopoly Service (FAS) received the investors' 
applications for an anti-monopoly review and then coordinated a review 
through the Russian government's security ministries. One transaction 
was eventually approved and one was not. As a result of these attempted 
investments, the Russian President's 2005 State of the Russian 
Federation speech called for legislation to formalize a process to 
protect Russia's interests by reviewing foreign investment in sensitive 
economic sectors, according to Russian government officials. 

In response, according to Russian government officials, the Ministry of 
Economic Development and Trade and the Ministry of Industry and Energy, 
in conjunction with the Russian presidential administration and the 
Russian security services, developed the proposed Strategic Sectors 
Law--which, according to a senior Russian government official, 
resembles certain aspects of the U.S. CFIUS process. Several versions 
of the legislation have been drafted; one version went to the Russian 
Duma for approval in July of 2007. According to the U.S. State 
Department, a more restrictive version of the Strategic Sectors Law and 
relevant amendments to the Subsoil Law were announced by the Russian 
government on February 21, 2008. As of February 26, 2008, the Strategic 
Sectors Law had not been passed, and is subject to change. The new 
draft of the Strategic Sectors Law and the Subsoil Law amendments could 
be considered by the Duma in the spring of 2008. 

The Russian legal system is based on civil, not common, law. As a 
result, according to a senior Russian government official, Russian laws 
are more detailed than might be the case under a common law system. 
This official noted that this characteristic of civil law systems 
partially explains the degree of detail that is found in the proposed 
Strategic Sectors Law. In addition, Russia's basis in civil law also 
helps illuminate why the lack of implementation procedures in the 1999 
Federal Law on Foreign Investments in Russia was particularly 
problematic. 

Review Process: 

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

Thresholds for Mandatory Review: 

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

Standard Review Time Frames: 

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

Use of Mitigation Agreements: 

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

Judicial Appeal of Review Decisions: 

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

New Developments: 

The Russian government's Ministry of Economic Development and Trade and 
the Ministry of Industry and Energy, in conjunction with the 
presidential administration and the security services, developed a new 
Strategic Sectors Law. The new draft of the law could be considered by 
the Duma in the spring of 2008, according to the U.S. State Department. 
If passed, the law will create an interagency review process for 
foreign investment. The July 2007 version of the proposed Strategic 
Sectors Law specified 39 sectors that are considered sensitive. Among 
other changes, the February 2008 version of the draft combined some 
sectors and added four strategic sectors to the list. 

Under the proposed law, investors would still apply to the FAS for an 
anti-monopoly review, but would also be subject to a separate review if 
the proposed investment falls within a covered sector. According to the 
July 2007 draft of the Strategic Sectors Law, the review will occur 
within an interagency body representing a range of Russian government 
economic and security ministries, potentially headed by the Prime 
Minister's office. The interagency body may include: 

* the Federal Anti-Monopoly Service, 

* the Ministry of Economic Development and Trade, 

* the Ministry of Industry and Energy, 

* the Ministry of Defense, and: 

* the Federal Security Service. 

However, according to Russian government officials, the Russian 
government has not decided which government entity will receive 
applications for review. Further, according to the U.S. State 
Department, as of February 2008, the government had not reached 
agreement on which agency will lead the interagency group in reviewing 
investments, which has vital implications for the potential 
implementation of the proposed law. It is clear, however, that the 
February 2008 version of the draft reflects additional input from 
Russian security ministries, including the Federal Security Service. 

Under the most recent version of the proposed Strategic Sectors Law, 
foreign companies seeking to obtain greater than 50 percent or a 
controlling stake, as defined by the law, in a Russian company will 
need to obtain Russian government approval if the target company is in 
a listed sector. These are: 

* pathogens; 

* nuclear devices and radiation sources; 

* coding/cryptographic equipment; 

* explosives, weapons, and military machinery; 

* aviation security and machinery (except civil aviation); 

* any activities related to space; 

* natural monopolies (e.g., oil and gas extraction); and: 

* metals and alloys having special properties. 

The February 21, 2008, version of the Strategic Sectors Law adds four 
sectors to those that were included in the July 2007 draft. The 
additional sectors are: 

* telecommunications, 

* radio, 

* television, and: 

* fishing. 

In addition, the February version of the Strategic Sectors Law further 
limits unsupervised foreign acquisition of Russian companies that own 
licenses to develop "strategic subsoil assets" to 10 percent, according 
to the U.S. State Department. Further, entities partly owned by foreign 
governments would be subject to a 5 percent limit on unsupervised 
ownership, according to the most recent draft. Foreign entities seeking 
a greater share of relevant Russian companies would need Russian 
government approval from a special commission. 

The government approval includes both the mandatory anti-monopoly 
review and the national security review of the proposed investment. If 
a foreign investor does not seek a controlling stake, then only the 
standard FAS review is required. According to Russian government 
officials, the determination of what sector a proposed transaction 
falls within will be based on the acquired company's government-issued 
business license. 

According to Russian government officials and lawyers experienced with 
foreign investment in Russia, the proposed Strategic Sectors Law, like 
the current FAS review process, identifies the specific documents and 
materials that must be submitted for the review to be completed. Under 
the current FAS review process, the FAS can ask for supplemental 
documentation from the investor if it deems it necessary, which may 
delay the application process somewhat. However, according to the 
lawyers, this additional documentation is not normally difficult to 
provide or time-consuming. 

According to Russian government officials, the proposed Strategic 
Sectors Law identifies specific criteria against which the proposed 
transaction will be judged by the interagency review body that is 
designated to determine whether a national security consideration 
merits denying an application. Decision criteria include, for example, 
whether the company to be invested in: 

* possesses state secrets, 

* produces products subject to export controls, 

* produces military goods, or: 

* deals with natural monopolies (e.g., oil, gas). 

Under the proposed Strategic Sectors Law, the standard time frame for 
governmental review of foreign investment will be up to 90 days. In the 
event that the government determines that it needs additional time to 
complete its review, the initial 90-day review period can be extended 
by an additional 90 days, for a total of 180 days, or 6 months. 
According to the U.S. State Department, the Russian government has not 
decided whether the anti-monopoly review and the national security 
review will occur concurrently or consecutively. If held concurrently, 
the total review time frame would be 90 days, or 180 days in 
exceptional cases. If held consecutively, the total review time frame 
would expand to 120 days, or 210 days in exceptional cases. 

If a proposed transaction meets the criteria for possible denial, but 
the threat to Russian national interests can be mitigated, then, 
according to a Russian government official, the deal will be approved 
if the investor accepts certain required conditions. The proposed 
Strategic Sectors Law provides for a range of possible mitigation 
conditions that may be enacted. These may include: 

* a commitment to protect state secrets, including potential access 
limitations for the investor; 

* a commitment to continue deliveries of products, performance of work, 
and rendering of services under existing military contracts; 

* a commitment to maintain the acquired firm's mobilization capacity; 

* a commitment to work in accordance with tariffs subject to Russian 
Federation legislation on natural monopolies; 

* a commitment to the fulfillment of business plans for further 
development; 

* a commitment to measures to be taken aimed at preventing a threat to 
national security if martial law or a state of emergency is imposed; 
or: 

* a commitment to avoid staff layoffs for a designated period. 

For example, according to a Russian government official, the Russian 
law on state secrets governs and limits who can lead an organizational 
unit of a company that possesses Russian state secrets. If a Russian 
company were purchased by a foreign entity, based on signed mitigation 
conditions, the unit within the company holding state secrets may be 
required to be run by Russian nationals with security clearances. 
According to a Russian government official, it has not yet been decided 
which Russian governmental entity will be responsible for ensuring that 
signed mitigation conditions are adhered to by the foreign investor. 

The proposed Strategic Sectors Law provides for a judicial appeals 
process if the Russian government fails to issue a decision within 90 
days or within the designated extended time frame. 

The current 1999 Federal Law on Foreign Investment does not 
differentiate between foreign state-owned enterprises and others that 
seek to invest in Russia. According to Russian government officials, 
under the proposed Strategic Sectors Law, special rules will apply to 
foreign state-owned enterprises. Such entities will be barred from 
acquiring a controlling stake in Russian companies that are subject to 
the proposed Strategic Sectors Law, and in addition, foreign state- 
owned enterprises will have to seek Russian government approval to 
acquire a noncontrolling 25 to 49 percent stake in a Russian company. 

While reviews of foreign investment fall under the provisions of the 
1999 Federal Law on Foreign Investment as applied through the FAS anti- 
monopoly review process, the extraction of subsoil resources, for 
example, oil and natural gas, is subject to a range of requirements 
under the Russian Federation Law on Subsoil. The current standard has 
allowed foreign investment in certain projects above the 50 percent 
threshold. The Russian government is currently in the process of 
drafting amendments to the Subsoil Law that would implement a number of 
changes.[Footnote 62] The July 2007 draft of the amendments allowed 
foreign investment in strategic subsoil resources up to 50 percent of 
the total stake in the given reserve. In addition, according to a 
Russian government official, under the proposed amendments, the 
required licenses for operations will only be given to domestic 
extractors. Foreign investors will have to enter into joint ventures 
with Russian oil and gas companies to invest in these areas. 

Another important proposed change to the Subsoil Law would be the 
designation of certain reserves of subsoil resources (e.g., oil, 
natural gas, gold, and copper), that are larger than specified 
thresholds, to be "of federal significance" to the Russian Federation. 
The amendments would define "strategic field" as any oil field with 
extractable reserves of more than 70 million tons, gas fields with more 
than 50 billion cubic meters, and all offshore fields. Companies in 
which the Russian government is a majority owner would be exempt from 
limitations of foreign ownership. 

Other Foreign Investment Laws and Policies: 

In addition to the 1999 Federal Law on Foreign Investment, other laws 
and policies in Russia affect foreign investment. For example, based on 
a Presidential Decree, certain Russian state-owned enterprises (SOE) 
and companies are not open to foreign investment. This listing of over 
1,000 SOEs and companies that are off limits to foreign investment 
includes scientific, defense, and military factories and institutes; 
media companies; ports; airports; and shipping companies. According to 
a Russian government official, the Presidential Decree list and the 
companies in the sectors identified in the proposed Strategic Sectors 
Law may overlap. 

In addition to the listing of specific SOEs and companies that are off 
limits to foreign investment, certain individual sectors within the 
Russian economy also have investment limitations. For example, 
according to a Russian government official, foreign investment in the 
aviation sector in Russia cannot currently exceed 50 percent control of 
the target company, and foreign investors must seek approval for 
obtaining a 25 to 50 percent stake. 

[End of section] 

Appendix XII: United Arab Emirates: 

Figure: Foreign Investment in United Arab Emirates (stocks and flows 
2000-2006), U.S. dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $1; 
Flow: -$1. 

Year: 2001; 
Stock: $3; 
Flow: $2. 

Year: 2002; 
Stock: $3; 
Flow: $2. 

Year: 2003; 
Stock: $6; 
Flow: $4. 

Year: 2004; 
Stock: $17; 
Flow: $7. 

Year: 2005; 
Stock: $28; 
Flow: $8. 

Year: 2006; 
Stock: $37; 
Flow: $7. 

Source: United Nations (data). 

[End of figure] 

* The United Arab Emirates (UAE) ranked 32nd in terms of the average 
value of FDI inflows worldwide between 2000 and 2006. 

* The UAE was the 50th largest recipient of FDI in the world in 2006. 

* In 2006, FDI in the UAE totaled $37.1 billion, an increase of more 
than $36 billion over FDI stock in the UAE in 2000. 

* FDI stock in the UAE as a proportion of GDP was 22 percent in 2006. 

Background: 

The UAE is a loose federation of seven emirates, each with its own 
ruler. The UAE constitution established a government that includes a 
President, Vice President, Council of Ministers, Federal Supreme 
Council, and a 40-member Federal National Council. The Federal Supreme 
Council is the highest constitutional authority and is composed of the 
seven emirate rulers. 

According to U.S. State Department officials, the UAE has one of the 
most open economies in the Middle East. In 2005, foreign investment in 
the UAE was approximately $10 billion, accounting for nearly 34 percent 
of total foreign capital in the Arab world that year. Oil and natural 
gas production generated approximately 36 percent of the country's GDP 
in 2005. In addition, the UAE controls almost 10 percent of the world's 
oil reserves.[Footnote 63] However, only 15 to 20 percent of the UAE's 
4.4 million residents are UAE citizens. According to a UAE official, 
over 90 percent of private sector output comes from non-UAE residents. 

According to U.S. officials and oil industry representatives, there are 
important relationship components to doing business in Arab cultures. 
For example, foreign investment and joint ventures in the UAE's oil and 
natural gas industries are based on decades-long relationships between 
the government of the UAE and western business partners. 

Laws and Policies: 

According to U.S. and UAE officials, the Companies Law and the Agencies 
Law[Footnote 64] represent the largest legal barriers to foreign direct 
investment in the UAE. The Companies Law states that foreigners and 
foreign companies are prohibited from owning more than 49 percent of a 
company established in the UAE. The Agencies Law states that foreign 
importers must operate through an agent to bring goods into the UAE. 
This agent must be either a UAE national or a company that is wholly 
owned by a UAE national. 

According to U.S. and UAE officials, the Companies Law and the Agencies 
Law were implemented to ensure the country's economic growth would 
benefit its small citizen population by drawing UAE citizens into the 
workforce. However, according to a UAE official, since most private 
sector output comes from non-UAE citizens, these laws were particularly 
intended to draw UAE citizens from the government workforce into the 
private sector. Together, these efforts are sometimes referred to as 
the Emiratisation policy. According to a UAE official, these efforts 
reflect a constant tension between maintaining openness to the world 
and avoiding the social and political strife that can accompany efforts 
to modernize. 

Related Restrictions to Foreign Investment: 

The Government Tenders Law and the Federal Industry Law also restrict 
foreign investment in the UAE. The Government Tenders Law states 
government suppliers and contractors must be UAE citizens or companies 
at least 51 percent owned by UAE citizens. In addition, according to an 
official from the Office of the U.S. Trade Representative, each emirate 
has its own rules on government procurement. The Federal Industry Law 
states that industrial projects must be 51 percent owned by UAE 
citizens, and that projects must be managed by a UAE citizen or have a 
board of directors that has a majority of UAE citizens. 

In addition to the above restrictions, the UAE limits foreign ownership 
of land, with rules varying from emirate to emirate. The UAE also has 
sector-by-sector limits on foreign ownership. Some sectors, like 
insurance, telecommunications, and travel agencies, are still mostly 
closed to foreigners. Traditionally, foreign investment in the UAE's 
oil and natural gas sectors has been limited to 40 percent, divided 
among several foreign joint venture partners. Emirate-level governments 
retain control of the other 60 percent, according to U.S. and oil 
industry officials. 

Exceptions Exist to the UAE's Foreign Investment Restrictions: 

According to U.S. officials, the UAE has exceptions to the Agencies Law 
and the Companies Law, including 32 free trade zones (FTZ), which are 
special administrative areas governed by individual emirates, and 
country-specific exemptions. According to UAE officials, FTZs are not 
subject to any federal laws except criminal. Consequently, FTZs are 
exempt from the Companies, Agencies, Government Tenders, and Industry 
Laws. According to U.S. officials, FTZs usually have lower labor and 
tax requirements, and allow foreign companies to own 100 percent of an 
enterprise in any FTZ. This makes them attractive locations for 
foreigners to invest. However, according to U.S. officials, a foreign 
company invested in an FTZ that attempts to invest in non-FTZ areas 
would be subject to the UAE's foreign investment laws and regulations. 
According to one of these officials, this has created two separate and 
distinct economies in the UAE--the FTZ economy and the regular UAE 
economy. 

According to U.S. officials, many of the barriers associated with 
foreign direct investment do not apply to citizens of other Gulf 
Cooperation Council countries, including Saudi Arabia, Qatar, Bahrain, 
Oman, and Kuwait. U.S. officials said the result is that the UAE has 
three levels of access for investors, whereby UAE nationals receive the 
most investment access, Gulf Cooperation Council nationals receive 
slightly less access, and non-Gulf Cooperation Council nationals 
receive the least access to investment opportunities in the UAE. 

Practices: 

While the UAE does not have a formal foreign investment review process, 
according to U.S. and UAE officials, foreign investors are informally 
notified of sensitivities associated with attempted investments. 
According a UAE official, some sectors, like military production, 
contain sensitive technologies and are clearly, if not explicitly, off 
limits to foreign investors. Moreover, other sectors, like oil and 
natural gas, contain sensitive technologies, but foreigners are allowed 
to invest in them. Further, since these prohibitions are not codified, 
if a foreigner attempts to invest in an area deemed to be unacceptable, 
the investor will be privately redirected. 

According to U.S. and UAE officials, this practice is informal for 
several reasons. First, the UAE's reputation for having an open 
business environment is very important to its economic success. 
Consequently, the UAE government is hesitant to say publicly that a 
given sector is closed. Second, since business deals in the UAE are 
based on personal relationships, the UAE government generally believes 
it is better to handle rejections quietly. Third, the UAE and 
individual emirates try to direct foreign investment into sectors where 
they see a development need. Fourth, since the UAE has only existed as 
a nation since 1971, its informal practices are not yet 
institutionalized. 

The UAE has several national security concerns that, while not publicly 
stated, the government may consider when assessing foreign investment. 
For example, according to U.S. officials, the UAE treats oil and 
natural gas production as a national security issue since these 
industries represent a major portion of the country's GDP. U.S. 
officials told us that, as a consequence, the UAE government strictly 
controls investment in those areas, although restrictions are not made 
public. The UAE's labor market is another unstated national security 
concern, since the vast majority of private sector workers are 
foreigners. Water and power generation are considered strategic as 
well. 

New Developments: 

According to U.S. and UAE officials, the UAE is in the process of 
relaxing its investment laws. However, according to U.S. officials, 
this is difficult due to opposition from Emeriti citizens who benefit 
from the current laws. According to U.S. and UAE officials, current 
laws limiting foreign investment in the UAE are incongruent with the 
UAE's efforts to attract foreign investment. However, according to the 
U.S. State Department, the UAE's current laws have created interest 
groups in the UAE that depend on the benefits these rules provide. U.S. 
officials told us that opening investment outside the FTZs involves 
overcoming entrenched opposition from local constituencies, 
particularly those with agency agreements, making further 
liberalization of investment policies a slow process. 

According to U.S. and UAE officials, the UAE government plans to 
liberalize the Companies Law and the Agencies Law. For example, 
according to UAE officials, the UAE has modified the Agencies Law to 
allow companies to break contracts with nonperforming agents. These 
officials told us that companies can now petition the Ministry of the 
Economy to dissolve such contracts. However, according to a U.S. 
official, while foreign companies technically have legal recourse, in 
reality the process of dissolving a contract with a nonperforming agent 
is still extremely difficult. 

According to a UAE official, the central government intends eventually 
to dissolve the Companies Law and the Agencies Law. However, this 
probably will happen in stages. According to the same official, the 
current 49 percent cap on foreign ownership in the Companies Law likely 
will be raised to 75 percent, and then 100 percent. Moreover, this 
liberalization probably will happen on a sector-by-sector basis. 

[End of section] 

Appendix XIII: United Kingdom: 

Figure: Foreign Investment in United Kingdom (stocks and flows 2000-
2006), U.S. dollars in billions: 

[See PDF for image] 

The figure is a combination vertical bar and line graph. The following 
data is approximated from the graph: 

Year: 2000; 
Stock: $420; 
Flow: $100. 

Year: 2001; 
Stock: $500; 
Flow: $40. 

Year: 2002; 
Stock: $510; 
Flow: $0. 

Year: 2003; 
Stock: $600; 
Flow: $0. 

Year: 2004; 
Stock: $690; 
Flow: $50. 

Year: 2005; 
Stock: $800; 
Flow: $170. 

Year: 2006; 
Stock: $1,100; 
Flow: $100. 

Source: United Nations (data). 

[End of figure] 

* The United Kingdom (UK) ranked second in terms of the average value 
of FDI inflows worldwide between 2000 and 2006. 

* In 2006, FDI stock in the UK totaled $1,135 billion, an increase of 
$696.6 billion over FDI stock in 2000. 

* FDI stock in the UK as a proportion of GDP was 47.8 percent in 2006. 

Background: 

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

Foreign Investment Laws and Policies: 

The UK has no legal framework specifically designed to monitor foreign 
direct investment for national security reasons. However, the 
government has the authority under multiple laws to block specific 
transactions that are determined to be against the national interests 
of the United Kingdom. Since the UK is subject to European Union law, 
the European Union Merger Regulation, established in 1990, has shaped 
its policy on foreign investment because the regulation details the 
criteria under which a government can intervene in mergers and 
acquisitions. The Industry Act of 1975 provides the British government 
with the authority to intervene when the takeover of important 
manufacturing concerns by nonresidents is against the national 
interest.[Footnote 65] However, the British government has never used 
the authority provided under this act. The Enterprise Act of 2002 
provides the government the authority to intervene to block or place 
conditions on the approval of mergers and acquisitions involving 
British companies if the transaction is considered to be against the 
public interest. The authority under the act has been designated to the 
Secretary of State for the Department of Business, Enterprise, and 
Regulatory Reform (DBERR--previously the Department of Trade and 
Industry).[Footnote 66] The Enterprise Act overhauled the framework for 
regulating mergers in the UK, updating the Fair Trading Act of 1973. 

According to British government officials, the Enterprise Act is 
primarily intended as a review of competition or anti-trust concerns 
associated with mergers. However, the law allows for a "special 
intervention" when the Secretary of State determines that a transaction 
may harm the public interest. This allows the government to intervene 
if a foreign investment poses a threat to public security.[Footnote 67] 
The act, as amended, specifies that foreign investment involving 
national security, the media, or water is subject to a public interest 
intervention by the Secretary of State. The Enterprise Act provides 
specified considerations that are relevant to the United Kingdom's 
national security. However, the Secretary of State has broad authority 
to intervene due to considerations that, while not specified by the 
law, "in the opinion of the Secretary of State, ought to be so 
specified." Similarly, the Secretary of State has the authority to 
issue an order that effectively modifies the relevant section of the 
Enterprise Act so that considerations that have not been specified are 
effectively added to the law. The Enterprise Act also specifies that 
the Secretary of State has the authority to intervene in mergers 
involving a UK government contractor that possesses information 
"relating to defense and of a confidential nature." 

Transactions in which (1) sales exceed ï¿½17 million annually or (2) the 
relevant market share exceeds 25 percent may require a review by the 
British Office of Fair Trading. Additionally, the UK may intervene in a 
foreign investment of any size in the areas of national security or the 
media if the government deems it is in the public interest to do so and 
the Secretary of State issues a special intervention. 

Since the Enterprise Act merger provisions came into effect in 2003, 
the Secretary of State has issued an intervention notice six times on 
national security grounds; only one of these notices was issued when 
there was not also an accompanying anti-monopoly review. All six of 
these cases involve the protection of sensitive information associated 
with military programs. The Secretary of State approved each proposed 
transaction under the condition that the acquiring company accepts a 
series of undertakings to mitigate the security risk associated with 
the investment. According to business representatives familiar with the 
intervention and review process, one of the companies eventually did 
not complete the proposed approved deal. A seventh public interest 
intervention was initiated because of a merger in the media field. The 
Secretary of State issued an intervention notice for the acquisition of 
a minority share in a television broadcasting company in February 2007. 
The case was reviewed by the Competition Commission, one of the 
reviewing bodies under the Enterprise Act. The Competition Commission 
made recommendations to the Secretary of State, and in January 2008, 
the Secretary made an adverse public interest finding in the case and 
will require a partial divestment of shares. 

Related Restrictions to Foreign Investment: 

The British government restricts foreign investment in specific 
companies that it considers important to the national security of the 
UK. Through government ownership of a golden share established in the 
articles of association of each company, the UK has various rights 
related to citizenship requirements for the companies' boards of 
directors, control over the percentages of foreign-owned shares, or 
approval requirements for the dissolution or disposal of any strategic 
assets. This share does not give the government control over the 
companies' routine business activities, investment decisions, or 
appointments. The use of golden shares faced a number of adverse 
decisions from the European Court of Justice in 2002 and 2003, which 
ruled that the use of golden shares is acceptable only in specific 
circumstances and with strict conditions. However, the UK continues to 
use golden shares on the grounds of national security, and does not 
intend to dispose of these shares in certain strategic areas. 

Some prominent company specific limitations established in golden 
shares include the following: 

* BAE Systems limits foreign ownership of voting stocks to 15 percent. 

* Rolls-Royce limits foreign ownership of voting stocks to 15 percent. 
The British government's consent is required for the disposal of the 
company's nuclear business or the group as a whole. 

* British Energy requires the consent of the government to allow a 
purchase of more than 15 percent of its issued shares. 

* Other companies in which the government holds a golden share are 
Rosyth Royal Dockyard Limited, Davenport Royal Dockyard Limited, BAES 
(Marine) Limited, the Atomic Weapons Establishment, and QinetiQ. Each 
company's articles of association grant the government various rights, 
including the ability to impose certain restrictions and oversee major 
company decisions. 

Review Process: 

Government reviews of foreign investment are conducted by the Office of 
Fair Trading (OFT). If the OFT determines that there is potential for 
anti-competitive consequences from the transaction, it refers the 
transaction to the Competition Commission for further review. The 
Competition Commission may consult with the parties to the transaction 
and normally issues decisions in 30 days, although it is allowed 6 
months to complete the review. The Competition Commission can negotiate 
undertakings with the investor as conditions for approval of the 
transaction. Once a transaction is approved, the decision is final. It 
cannot be reopened, modified, or reversed. 

Prior to an official review, companies generally meet informally with 
the relevant agency to discuss the potential transaction. For example, 
the parties to a proposed transaction in the defense sector would 
normally consult in advance with the UK Ministry of Defense and 
negotiate acceptable undertakings so that Secretary of State would not 
need to issue a notice of intervention. During the informal review 
process, the relevant government offices consult with the investor and 
agree on undertakings. According to a lawyer familiar with the UK 
review process, the formal process primarily serves to provide a public 
comment period for the decisions that have already been made as part of 
the informal process. There is no requirement to notify the government 
of an investment before a transaction is completed. The government has 
4 months after a transaction is completed to decide if it is necessary 
to intervene. 

New Developments: 

According to British government officials, no changes are currently 
being considered to the United Kingdom's policies regarding foreign 
investment. It is possible that changes or additions to European Union 
policies in this area could affect the United Kingdom. In 2006, the 
potential takeover of a major oil company in the United Kingdom by a 
foreign state-owned oil company caused public controversy. However, 
British government officials discussed the potential transaction and 
decided that despite the possible threat to the United Kingdom's energy 
supply, the British government would not intervene in the transaction 
on public security grounds. 

The United Kingdom's Chancellor of the Exchequer outlined British 
policy toward sovereign wealth funds investing in the United Kingdom in 
his first speech as Chancellor. He stated that the United Kingdom 
welcomes foreign investment, including that of state-owned enterprises. 
To exemplify this openness, British government officials pointed out 
that all of the United Kingdom's ports are owned by Dubai Ports World. 

[End of section] 

Appendix XIV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Ann M. Calvaresi-Barr, (202) 512-4841 [email protected]: 

Staff Acknowledgments: 

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

[End of section] 

Footnotes: 

[1] Testimony of Deputy Secretary Robert M. Kimmitt, U.S. Department of 
the Treasury, before the U.S. Senate Committee on Banking, Housing, and 
Urban Affairs, October 20, 2005. 

[2] By "U. S. companies" we mean companies engaged in interstate 
commerce in the United States. 

[3] Omnibus Trade and Competitiveness Act of 1988 ï¿½ 5021, Pub. L. No. 
100-418, 102 Stat. 1107 (1988) (codified at 50 U.S.C. App. ï¿½ 2170). 

[4] Pub. L. No. 110-49 (2007). 

[5] The Foreign Investment and National Security Act of 2007 became 
effective on October 24, 2007. 

[6] GAO, Defense Trade: Enhancements to the Implementation of Exon- 
Florio Could Strengthen the Law's Effectiveness, GAO-05-686 
(Washington, D.C.: Sept. 28, 2005); Defense Trade: Mitigating National 
Security Concerns under Exon-Florio Could Be Improved, GAO-02-736 
(Washington, D.C.: Sept. 12, 2002); Defense Trade: Identifying Foreign 
Acquisitions Affecting National Security Can Be Improved, GAO/NSIAD-00-
144 (Washington, D.C.: June 29, 2000). 

[7] GAO, Foreign Investment: Foreign Laws and Policies Addressing 
National Security Concerns, GAO/NSIAD-96-61 (Washington, D.C.: Apr. 2, 
1996). 

[8] Sovereign wealth funds are entities that can manage national 
savings for the purposes of investment. These funds may be similar in 
their investment behavior to other forms of investment funds, such as 
private equity funds. However, they fundamentally differ in that they 
are not privately owned. 

[9] In this report, we use the term "foreign investment" to refer to 
foreign direct investment, specifically mergers and acquisitions, 
because Exon-Florio governs foreign direct investment via mergers, 
acquisitions, and takeovers in the United States, and this law is the 
basis of our work. 

[10] Foreign direct investment is measured in both stocks and flows. 
Foreign direct investment stocks are data showing an economy's 
cumulative direct investment assets and liabilities at a given point in 
time. The stock of foreign direct investment results from an 
accumulation of flows. Foreign direct investment flows are transactions 
between an investor in one economy and an enterprise in another economy 
that occurred during a specific time period. 

[11] Subsequently the Foreign Investment and National Security Act of 
2007 statutorily established CFIUS and its membership. 

[12] The number of notices received by CFIUS in 2006 and 2007 slightly 
exceeded the number of distinct transactions reviewed because several 
cases were terminated prior to completion of a review, either because 
of withdrawal or dismissal for lack of jurisdiction. 

[13] The International Emergency Economic Powers Act allows the 
President to declare a national emergency to deal with extraordinary 
threats to national security or the economy. 50 U.S.C. ï¿½ï¿½ 1701-1706. 

[14] Investment Canada Act, June, 20, 1985. 

[15] Bill C-59, an Act to Amend the Investment Canada Act, First 
Reading, June 20, 2005. 

[16] The seven sectors identified as critical are defense, power 
generation and distribution, oil and petrochemical, telecommunications, 
coal, aviation, and shipping. In addition, sectors have been identified 
in which the government should maintain control: equipment 
manufacturing, automotive, electronic information, construction, iron 
and steel, nonferrous metal, chemical, survey and design, and science 
and technology. 

[17] See appendix VI for a list of the 11 sectors. 

[18] The Organization for Economic Co-operation and Development has 
also issued guidance on the corporate governance of state-owned 
enterprises. 

[19] The IMF has encouraged exporters of nonrenewable resources to 
build up sovereign wealth funds in preparation for when the price of 
these resources fall, or when they are no longer able to rely on the 
export of such resources. 

[20] Under the proposed Strategic Sectors Law, the review time frame is 
90 days, with the possibility of a 90-day extension. 

[21] Article 21 (4) of the European Commission Merger Regulation 
provides the possibility for member states to take measures to protect 
their legitimate interests, other than defending against competition, 
if they are compatible with the general principles and other provisions 
of European Community law. Public security, plurality of the media, and 
prudential rules are generally acknowledged as legitimate interests. If 
national governments adopt incompatible measures, the European 
Commission is entitled to adopt a decision declaring them illegal and 
requiring their withdrawal. 

[22] GAO, Foreign Investment: Foreign Laws and Policies Addressing 
National Security Concerns. GAO/NSIAD-96-61 (Washington, D.C.: Apr. 2, 
1996). 

[23] Pub. L. No. 110-49 (2007). 

[24] 50 U.S.C. App. ï¿½ 2170 (2006). 

[25] Exec. Order No. 11,858, 3 C.F.R. 990 (1971-1975), as amended by 
Exec. Order No. 12,188, 3 C.F.R. 131 (1981); Exec. Order No. 12,661, 3 
C.F.R. 618 (1989); Exec. Order No. 12,860, 3 C.F.R. 629 (1994); and 
Exec. Order No. 13,286, 3 C.F.R. 166 (2004). 

[26] In section 721 (b)(2)(D)FINSA also provides that an investigation 
is not required for transactions involving critical infrastructure if 
the Secretary of the Treasury and the lead agency jointly determine 
that the transaction will not impair the national security of the 
United States. 

[27] The original factors include (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 United States to meet the 
requirements of national security; (4) the potential effects of the 
transaction on sales of military goods, equipment, or technology to any 
country identified under applicable law as (a) supporting terrorism or 
(b) a country of concern for missile proliferation or the proliferation 
of chemical and biological weapons; and (5) the potential effects of 
the transaction on U.S. international technological leadership in areas 
affecting national security. 51 U.S.C. App. ï¿½ 2170(f) (2006). 

[28] We reported in September 2005 that, in some instances, the parties 
to a transaction withdrew their notification to CFIUS during the 45-day 
investigation and refiled notifications, thus avoiding a presidential 
decision and the resultant report to Congress. See GAO, Defense Trade: 
Enhancements to the Implementation of Exon-Florio Could Strengthen the 
Law's Effectiveness, GAO-05-686 (Washington, D.C.: Sept. 28, 2005), 17. 

[29] Investment Canada Act, June, 20, 1985. 

[30] The 2008 threshold for any direct acquisition of a Canadian 
business by an investor from a WTO country is Can$295 million. For 
investments from non-WTO member countries and investments in certain 
sectors (cultural businesses, transportation, financial services, or 
the production of uranium) the threshold is Can$5 million for direct 
investments and Can$50 million for indirect transactions. Except for 
transaction exempted from the act, all transactions above these 
designated dollar thresholds are required to be reviewed. 

[31] Transactions in these sectors have a Can$5 million threshold for 
review. 

[32] Bill C-59, an Act to Amend the Investment Canada Act, First 
Reading, June 20, 2005. 

[33] Government of Canada, Sharpening Canada's Competitive Edge. 
Ottawa, Oct. 30, 2007. 

[34] These regulations update a version promulgated in 2003. 

[35] Articles 43, 48, 56, and 57 of the EC Treaty. 

[36] More explicitly, the EC Treaty allows member states to "take any 
necessary measures for the protection of the essential interests of 
their security which are connected with the production of or trade in 
arms, munitions, and war material." 

[37] Article L. 151-1. 

[38] Article L. 151-2. 

[39] Article L. 151-3. 

[40] C-54/99 (Eglise de Scientologie). 

[41] According to the ECJ opinion, the requirements of public security 
must be interpreted strictly, and public security may be relied on only 
if there is a genuine and sufficiently serious threat to a fundamental 
interest of society. 

[42] According to French government officials, gambling and casinos are 
used to launder money, which the French seek to prevent. 

[43] The EC asked France to amend its regulations in part because 
France's regulations allowed for restrictions on investments by 
companies that are legally established in the European Union and have 
shareholders in non-EU countries, as indirect investments are subject 
to review under the French regime. 

[44] According to French law 233-3, a company is deemed to "control" 
another company: 

* when it directly or indirectly holds a fraction of the capital that 
gives it a majority of the voting rights at that company's general 
meetings; 

* when it alone holds a majority of the voting rights in that company 
by virtue of an agreement entered into with other partners or 
shareholders and this is not contrary to the company's interests; 

* when it effectively determines the decisions taken at that company's 
general meetings through the voting rights it holds; 

* when it is a partner in, or shareholder of, that company and has the 
power to appoint or dismiss the majority of the members of that 
company's administrative, management, or supervisory structures. 

Further it is presumed to exercise such control when it directly or 
indirectly holds a fraction of the voting rights above 40 percent and 
no other partner or shareholder directly or indirectly holds a fraction 
larger than its own. 

[45] As listed in Annex IV of European Council Regulation No. 1334/2000 
of June 22, 2000. 

[46] Articles 43, 48, 56, and 57 of the EC Treaty. 

[47] Article 296. 

[48] What constitutes the essential security interests of Germany is 
not defined within Article 296. 

[49] Foreign Trade and Payments Act of the Federal Republic of Germany, 
April 28, 1961. 

[50] The firm subsequently sold its stake in 2004. 

[51] Specifically, companies that produce or develop motors or gear 
systems for combat tanks or other armored military tracked vehicles are 
subject to review. 

[52] The other primary law relating to foreign investment is the 
Industries (Development and Regulation) Act of 1951, which is discussed 
later in this appendix. 

[53] With FIPB approval, investment can exceed the sector ownership 
caps in specific instances. 

[54] Foreign investment is allowed in "integrated townships" including 
housing, commercial units, resorts and hotels. Foreign institutional 
investors can also invest in real estate Initial Public Offerings. 

[55] The law has been referred to by GAO in a past report as the 
Foreign Exchange and Foreign Trade Control Law (FECL). GAO is currently 
using the translation of the law released by the Office of the Cabinet 
Secretariat of the Japanese government. 

[56] Specific countries that have conducted reciprocal investment 
agreements are listed in the ordinance implementing FEFTA. 

[57] Specifically, FEFTA requires prior notification for capital 
transactions that (1) may disturb fulfillment of an international 
agreement or contribution to international peace by Japan; (2) might 
make the maintenance of Japan's balance of international payments 
difficult; (3) might result in the drastic fluctuation of Japan's 
foreign exchange rates; or (4) transfers funds between Japan and 
foreign countries in a large volume, and thereby might adversely affect 
Japan's financial or capital market. 

[58] GAO, Foreign Investment: Foreign Laws and Policies Addressing 
National Security Concerns, GAO/NSIAD-96-61 (Washington D.C.: Apr. 2, 
1996). 

[59] The second constitution that includes this provision is the 
Constitution of Surinam. 

[60] The only Dutch exception to the principle of national treatment is 
in air transport. As in the United States, bilateral and multilateral 
agreements provide nationality and ownership requirements for Dutch 
airlines. 

[61] The European Community Treaty allows for countries to restrict the 
free movement of capital in cases determined to be justified on public 
policy or public security grounds. 

[62] According to Russian government officials, the Subsoil Law 
Amendments were originally to be included in the proposed Strategic 
Sectors Law. However, it was later determined that the Subsoil Law 
Amendments should be separated from the proposed Strategic Sectors Law. 

[63] Most of these reserves are located in the Emirate of Abu Dhabi. 

[64] The Commercial Companies Law No. 8 of 1984 is commonly referred to 
as the "Companies Law." Federal Act No. 18 of 1981 Concerning 
Organizing Trade Agencies is commonly referred to as the "Agencies 
Law." 

[65] The law does not define the term "important." However, 
manufacturing industries are defined under the Standard Industrial 
Classification Orders and include defense-related sectors such as 
ordnance and aerospace equipment manufacturing. 

[66] The Department of Business, Enterprise, and Regulatory Reform is 
charged with recommending intervention on the basis of public interest 
when necessary. If intervention is recommended, the UK Secretary of 
State at DBERR issues a special intervention and refers the matter to 
the Office of Fair Trading and the Competition Commission for further 
review. 

[67] The authority can be invoked regardless of the domicile of the 
involved parties; hence, a transaction could involve only British 
nationals. 

[End of section] 

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