Order Code RS22863
April 17, 2008
Foreign Investment, CFIUS, and Homeland
Security: An Overview
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
The President is generally seen as exercising broad discretionary authority over
developing and implementing U.S. direct investment policy, including the authority to
suspend or block investments that “threaten to impair the national security.” Congress
is also directly involved in formulating the scope and direction of U.S. foreign
investment policy and some Members are urging the President to be more aggressive in
blocking certain types of foreign investments. Such confrontations reflect vastly
different philosophical and political views between members of Congress and between
Congress and the Administration over the role foreign investment plays in the economy
and the role that economic activities should play in the context of U.S. national security
policy. In July 2007, Congress asserted its own role in making and conducting foreign
investment policy when it adopted and the President signed P.L. 110-49, the Foreign
Investment and National Security Act of 2007. This law broadens Congress’ oversight
role and it explicitly includes the areas of homeland security and critical infrastructure
as separately identifiable components of national security that the President must
consider when evaluating the national security implications of a foreign investment
transaction. The act may well draw Congress into a greater dialogue, and possibly
greater conflict, with the Administration over efforts to define the limits of the broad
rubric of national economic security. This report will be updated as warranted by
events.
Foreign Direct Investment in the United States
The United States is the largest foreign direct investor in the world and also the
largest recipient of foreign direct investment. By year-end 2006, foreign direct investment
in the United States had reached $1.8 trillion and U.S. direct investment abroad had
reached $2.4 trillion. This dual role means that globalization, or the spread of economic
activity by firms across national borders, has become a prominent feature of the U.S.
economy and that through direct investment the U.S. economy has become highly
enmeshed with the broader global economy.

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The globalization of the economy also means that the United States has important
economic, political, and social interests at stake in the development of international
policies regarding direct investment. With some exceptions for national security,1 the
United States has established domestic policies that treat foreign investors no less
favorably than U.S. firms. In addition, the United States has led efforts over the past 50
years to negotiate internationally for reduced restrictions on foreign direct investment, for
greater controls over incentives offered to foreign investors, and for equal treatment under
law of foreign and domestic investors. In light of the terrorist attacks on the United States
on September 11, 2001, however, some Members are questioning this open-door policy
and are arguing for greater consideration of the long-term impact of foreign direct
investment on the structure and the industrial capacity of the economy, and on the ability
of the economy to meet the needs of U.S. defense and security interests.
Committee on Foreign Investment in the United States (CFIUS)
Arguably the most important, and most controversial, activities related to foreign
direct investment are the reviews and investigation of foreign investments in the United
States by the Committee on Foreign Investment in the United States (CFIUS).2 The
Committee is an interagency organization that serves the President in overseeing the
national security implications of foreign investment in the economy. Originally
established by an Executive Order of President Ford in 1975, the committee has operated
until recently in relative obscurity.3 CFIUS has “the primary continuing responsibility
within the Executive Branch for monitoring the impact of foreign investment in the
United States, both direct and portfolio, and for coordinating the implementation of
United States policy on such investment.”4 Following its creation by Executive Order,
the Committee met infrequently and played a low-profile role in monitoring foreign
investment in the economy until 1988 when Congress approved the Exon-Florio
provision.5
The Exon-Florio provision grants the President broad discretionary authority to take
what action he considers to be “appropriate” to suspend or prohibit proposed or pending
foreign acquisitions, mergers, or takeovers which “threaten to impair the national
security.” In this act, national security was not defined, but was meant to be interpreted
broadly. Nevertheless, regulations developed by the Treasury Department to implement
the law direct the members of CFIUS to focus their reviews of foreign investments
exclusively on those transactions that involve “products or key technologies essential to
the U.S. defense industrial base,” and not to consider economic concerns more broadly.
CFIUS also indicated that in order to assure an unimpeded inflow of foreign investment
1 CRS Report RL33103 Foreign Investment in the United States: Major Federal Statutory
Restrictions
, by Michael V. Seitzinger.
2 For additional information, see CRS Report RL33388, The Committee on Foreign Investment
in the United States (CFIUS)
, by James K. Jackson.
3 Executive Order 11858 (b), May 7, 1975, 40 F.R. 20263.
4 Ibid.
5 P.L. 100-418, Title V, Sec. 5021, August 23, 1988; 50 USC Appendix sect. 2170. For
additional information, see CRS Report RL33312, The Exon-Florio National Security Test for
Foreign Investment
, by James K. Jackson.

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it would implement the statute “only insofar as necessary to protect the national security,”
and “in a manner fully consistent with the international obligations of the United States.”6
When Congress adopted the Exon-Florio provision, many Members were concerned
that the United States could not prevent foreign takeovers of U.S. firms unless the
President declared a national emergency or regulators invoked federal antitrust,
environmental, or securities laws. Through the Exon-Florio provision, Congress
attempted to strengthen the President’s hand in conducting foreign investment policy,
while limiting its own role as a means of emphasizing that, as much as possible, the
commercial nature of investment transactions should be free from political considerations.
Congress also attempted to balance public concerns about the economic impact of certain
types of foreign investment with the nation’s long-standing international commitment to
maintaining an open and receptive environment for foreign investment.
While CFIUS’s activities often seem to be quite opaque, the Committee is not free
to establish an independent approach to reviewing foreign investment transactions, but
operates under the authority of the President and reflects his attitudes and policies. As a
result, any discretion CFIUS uses to review and to investigate foreign investment cases
reflects policy guidance from the President. Foreign investors are also constrained by
legislation that bars foreign direct investment in such industries as maritime, aircraft,
banking, resources and power.7 Generally, these sectors were closed to foreign investors
prior to passage of the Exon-Florio provision in order to prevent public services and
public interest activities from falling under foreign control, primarily for national defense
purposes.
The Exon-Florio process is comprised of three different steps for reviewing proposed
or pending foreign “mergers, acquisitions, or takeovers” of “persons engaged in interstate
commerce in the United States” to determine if the transaction “threatens to impair the
national security.” CFIUS has 30 days to conduct a review, 45 days to conduct an
investigation, and then the President has 15 days to make his determination. The
President is the only officer with the authority to suspend or prohibit mergers,
acquisitions, and takeovers.
Neither Congress nor the Administration have attempted to define the term national
security as it appears in the Exon-Florio statute. Treasury Department officials have
indicated, however, that during a review or investigation each member of CFIUS is
expected to apply that definition of national security that is consistent with the
representative agency’s specific legislative mandate.8 For instance, over time and through
a series of Executive Orders, the Department of Defense has developed the National
Industrial Security Program (NISP) through which it has adopted various provisions under
the term, “Foreign Ownership, Control, or Influence (FOCI).” These provisions attempt
to prevent foreign firms from gaining unauthorized access to “critical technology,
6 Ibid.
7 CRS Report RL33103, Foreign Investment in the United States: Major Federal Restrictions,
by Michael V. Seitzinger.
8 Senate Armed Services Committee, Briefing on the Dubai Ports World Ports Deal, February
23, 2006.

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classified information, and special classes of classified information” through an
acquisition of U.S. firms that it could not gain access through an export control license.
This type of review is run independently of and parallel to a CFIUS review.
In 2007, Congress changed the way foreign direct investments are reviewed through
P.L. 110-49, the Foreign Investment and National security Act of 2007.9 Through P.L.
110-49, Congress strengthened its role in two fundamental ways. First, Congress
enhanced its oversight capabilities by requiring greater reporting to Congress by CFIUS
on the Committee’s actions either during or after it completes reviews and investigations
and by increasing reporting requirements on CFIUS. Second, Congress fundamentally
altered the meaning of national security in the Exon-Florio provision by including critical
infrastructure and homeland security as areas of concern comparable to national security.
The law also requires the Director of National Intelligence to conduct reviews of any
investment that poses a threat to the national security. The law provides for additional
factors the President and CFIUS are required to use in assessing foreign investments,
including the implications for the nation’s critical infrastructure.
In another change, P.L. 110-49 requires CFIUS to investigate all foreign investment
transactions in which the foreign entity is owned or controlled by a foreign government,
regardless of the nature of the business. Some foreign investors may well regard this
approach as a change in policy by the United States toward foreign investment. Prior to
this change, foreign investment transactions were reviewed in a way that presumed that
the transactions contributed positively to the economy. Consequently, the burden of proof
was on the members of CFIUS to prove during a review that a particular transaction
threatened to impair national security. P.L. 110-49, however, shifted the burden onto
firms that are owned or controlled by a foreign government to prove that they are not a
threat to national security. In any given year, the number of investment transactions in
which the foreign investor is associated with a foreign government likely is small
compared with the total number of foreign investment transactions. The number of such
transactions, however, is growing as some foreign governments experience a surge in
their foreign exchange reserves and they establish sovereign wealth funds and invest their
reserve funds abroad in an array of activities, including in U.S. businesses.
Homeland Security
Arguably, the terrorist attacks of September 11, 2001 and a dissatisfaction among
some Members over a perceived lack of responsiveness by the administration, reshaped
Congressional attitudes toward the Exon-Florio provision. This changed perception
became apparent in 2006 as a result of the public disclosure that Dubai Ports World10 was
9 P.L. 110-49 originated in the first session of the 110th Congress as S. 1610, the Foreign
Investment and National Security Act of 2007, introduced by Senator Dodd on June 13, 2007.
On June 29, 2007, the Senate adopted S. 1610 in lieu of a competing House version, H.R. 556
by unanimous consent. On July 11, 2007, the House accepted the Senate’s version of H.R. 556
by a vote of 370-45 and sent the measure to the President, who signed it on July 26, 2007. On
January 23, 2008, President Bush issued Executive Order 13456 implementing the law.
10 Dubai Ports World was created in November 2005 by integrating Dubai Ports Authority and
Dubai Ports International. It is one of the largest commercial port operators in the world with
(continued...)

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attempting to purchase the British-owned P&O Ports,11 with operations in various U.S.
ports. After the September 11 terrorist attacks Congress passed and President Bush
signed the USA PATRIOT Act of 2001 (Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism).12 In this act, Congress
provided for special support for “critical infrastructure,” which it defined as:
systems and assets, whether physical or virtual, so vital to the United States that the
incapacity or destruction of such systems and assets would have a debilitating impact
on security, national economic security, national public health or safety, or any
combination of those matters.13
This broad definition is enhanced to some degree by other provisions of the act,
which specifically identify sectors of the economy that Congress considered as elements
in the critical infrastructure of the nation. These sectors include telecommunications,
energy, financial services, water, transportation sectors,14 and the “cyber and physical
infrastructure services critical to maintaining the national defense, continuity of
government, economic prosperity, and quality of life in the United States.”15 The
following year, Congress transferred the responsibility for identifying critical
infrastructure to the Department of Homeland Security (DHS) through the Homeland
Security Act of 2002.16 In addition, the Homeland Security Act added key resources to
the list of critical infrastructure (CI/KR) and defined those resources as: “publicly or
privately controlled resources essential to the minimal operations of the economy and
government.”17 Through a series of Directives, the Department of Homeland Security has
identified 17 sectors18 of the economy as falling within the definition of critical
infrastructure/key resources and assigned primary responsibility for those sectors to
various Federal departments and agencies, which are designated as Sector-Specific
10 (...continued)
operations in the Middle East, India, Europe, Asia, Latin America, the Carribean, and North
America.
11 Peninsular and Oriental Steam Company is a leading ports operator and transport company
with operations in ports, ferries, and property development. It operates container terminals and
logistics operations in over 100 ports and has a presence in 18 countries.
12 P.L. 107-56, Title X, Sec. 1014, October 26, 2001; 42 U.S.C. Sec. 5195c(e).
13 Ibid.
14 42 U.S.C. Sec. 5195c(b)(2).
15 42 U.S.C. Sec. 5195c(b)(3).
16 P.L. 107-296, Sec. 2, November 25, 2002; 6 USC, Sec. 101.
17 6 USC, Sec 101(9).
18 The sectors include 1) Agriculture and Food; 2) Defense Industrial Base; 3) Energy; 4) Public
Health and Healthcare; 5) National Monuments and Icons; 6) Banking and Finance; 7) Drinking
Water and Water Treatment Systems; 8) Chemical; 9) Commercial Facilities; 10) Dams; 11)
Emergency Services; 12) Commercial Nuclear Reactors, Materials, and Waste; 13) Information
Technology; 14) Telecommunications; 15) Postal and Shipping; 16) Transportation Systems; 17)
Government Facilities.

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Agencies (SSAs).19 On March 3, 2008, Homeland Security Secretary Chertoff signed an
internal DHS memo designating Critical Manufacturing as the 18th sector on the CI/KR
list.
Conclusions
The broad sweep of industrial sectors in the economy that fall within the terms
“critical infrastructure,” “homeland security,” and “key resources” reflects a fundamental
change in the way some in Congress view national economic security. From this
viewpoint, economic activities are a separately identifiable component of national security
and, therefore, should be protected from foreign investment that transfers control to
foreigners or shifts technological leadership abroad. This viewpoint, however, has not
been shared by some policymakers within the administration, who argue that including
critical infrastructure and homeland security in P.L. 110-49 did not alter the overriding
focus of the Exon-Florio provision on investments that directly affect U.S. national
defense security. As a result, Congress and the Administration have sparred at times over
transactions that CFIUS has approved over the objections of various Members of
Congress. This clash of views essentially revolves around three long-standing issues: a)
what constitutes foreign control of a U.S. firm?; b) how should national security be
defined?; and c) which types of economic activities should be targeted for a CFIUS
review?
Some Members also perceive greater risks to the economy arising from foreign
investments by firms that are owned or controlled by foreign governments as a result of
the terrorist attacks. The Dubai Ports World case, in particular, demonstrated that there
was a difference between the post-September 11, 2001 expectations held by many in
Congress about the role of foreign investment in the economy and of economic
infrastructure issues as a component of national security. For some Members of
Congress, CFIUS seemed to be out of touch with the post-September 11, 2001 view of
national security, because it remained founded in the late 1980s orientation of the Exon-
Florio provision, which views national security primarily in terms of national defense and
downplays or even excludes a broader notion of economic national security.
These and other concerns about foreign investment underscore the significant
differences that remain between Congress and the Administration over the operations of
CFIUS and over the economic and security objectives the Committee should be pursuing.
The proposed acquisition of P&O by Dubai Ports World sparked a broader set of concerns
and a wide-ranging discussion between Congress and the Administration over a working
set of parameters that establishes a functional definition of the national economic security
implications of foreign direct investment. In part, this issue reflects differing assessments
of the economic impact of foreign investment on the U.S. economy and differing political
and philosophical convictions among Members and between the Congress and the
Administration.
19 Sector-Specific Agencies include the Departments of: Agriculture, Defense, Energy, Health
and Human Services, Homeland Security, Interior, Treasury, and the Environmental Protection
Agency.