Foreign Investment, CFIUS, and Homeland
Security: An Overview
James K. Jackson
Specialist in International Trade and Finance
February 4, 2010
Congressional Research Service
7-5700
www.crs.gov
RS22863
CRS Report for Congress
P
repared for Members and Committees of Congress
Foreign Investment, CFIUS, and Homeland Security: An Overview
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’s 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.
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Foreign Investment, CFIUS, and Homeland Security: An Overview
Contents
Foreign Direct Investment in the United States ............................................................................ 1
Committee on Foreign Investment in the United States (CFIUS) ................................................. 1
Homeland Security...................................................................................................................... 3
Conclusions ................................................................................................................................ 4
Contacts
Author Contact Information ........................................................................................................ 6
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Foreign Investment, CFIUS, and Homeland Security: An Overview
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 2008, foreign direct investment in the United States had
reached $2.3 trillion and U.S. direct investment abroad had reached $3.2 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.
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 have
questioned this open-door policy and have argued 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
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, CRS
Report RL33312, The Exon-Florio National Security Test for Foreign Investment, by James K. Jackson.
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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 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
6 Ibid.
7 CRS Report RL33103, Foreign Investment in the United States: Major Federal Statutory 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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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,
classified information, and special classes of classified information” through an acquisition of
U.S. firms that it could not gain access to 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 have regarded 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, has grown as some foreign governments experienced a surge in their foreign exchange
reserves and they established sovereign wealth funds and invested 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 attempting to purchase the British-owned
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 operations in the Middle East, India,
Europe, Asia, Latin America, the Carribean, and North America.
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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 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 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
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.
19 Sector-Specific Agencies include the Departments of: Agriculture, Defense, Energy, Health and Human Services,
Homeland Security, Interior, Treasury, and the Environmental Protection Agency.
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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, 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 Bush Administration sparred at times over transactions that
CFIUS has approved over the objections of various Members of Congress. This clash of views
essentially revolved 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 viewed national security primarily in terms of national defense and
downplayed or even excluded a broader notion of economic national security.
These and other concerns about foreign investment underscore the significant differences that
remained between Congress and the Bush Administration over the operations of CFIUS and over
the economic and security objectives the Committee should be pursuing. By November 2009,
there have been no cases before CFIUS during the Obama Administration that attracted the
attention of Congress or the public, and the Obama Administration had not issued a statement on
foreign investment that provided a key to assess any change in views from those of the Bush
Administration. 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 various
administrations.
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Author Contact Information
James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
Congressional Research Service
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