Special Report

What is the current state of FDI regulations in the APEC industrialized economies? To what extent have they achieved the Bogor Goals with respect to free and open investment by 2010?



Every three years, APEC releases a compendium of the self-reported FDI policies of its 21 member economies. However, the self-reported and rhetorical nature of this report limits its utility as a comparative tool. This is also true for the OECD's review of FDI policies―they rely on self-reported data, and, moreover, deliberately exclude data pertaining to rejections and approvals of requests to invest. However, investors, and therefore governments who wish to attract investors, may be more interested in such data due to the chance of being stopped in the middle of a transaction due to political pressure. This paper aims to present these data in a compelling and comparative manner in order to stimulate discussion among regulators and inform investors about governments' real track record on granting approvals. This paper focuses on APEC industrialized economies for two reasons: 1) The APEC industrialized economies each made their data on investment rejections and approvals available, so the task was possible, something that is not true in many countries around the world and the cited reason why the OECD does not include such data; and 2) The APEC industrialized economies evaluated their progress toward the Bogor Goals in 2010, but it is impossible for bureaucrats to evaluate something as political as politicized FDI blocking.

FDI is an increasingly important area of the regional economy. To mitigate our governments' regulatory excesses could help to improve our region's economic efficiency via improved capital allocation.

Why should this paper's methodology have more weight than that of the OECD in this field? First, a methodology seems highly questionable if it results in a rating that is less restrictive for an economy blocking more than three transactions per year (the United States) and one blocking dozens of transactions each year (Australia) than those economies that are blocking one or two transactions measured over a period of several decades (Japan and Canada, respectively); also, we have detailed below other issues to support our argument. The OECD defends its results on the basis that they correspond with foreign investment volume. However, a measure that only measures regulatory restrictiveness on the margins has little reason to coincide with FDI volume. GDP growth, natural resources, and many other factors should be far more powerful than minor differences in FDI restrictiveness among the developed countries when determining whether to make an investment. Regulatory restrictiveness is important at the margins, but there is no clear reason why it should determine FDI volume, and indeed it does not appear to in this report or the OECD report. The most confusing methodology decision by the OECD to this author (mentioned in the 2010 update and consistent with the 2006 edition) is that it excludes all restrictions based on Article 3 of the OECD Code of Liberalisation. That is, any time an OECD Code member country actually restricts foreign investment in the only legally permissible way, such data is excluded. The OECD drafters defend this decision on the grounds that it is difficult to measure the actual blocking of investment. While this may be true for some economies, it is surely easier to look at available data and news stories and estimate than it was to create the OECD's multi-sector weighted methodology, and the guesswork involved is less influential in the results than coming up with weights for the various categories. This paper thus attempts to fill this gap and the need for research based on actual restrictions on investment in the Asia-Pacific region with respect to the five industrialized economies that are to have achieved the Bogor Goals for free and open trade and investment this year, as well as other economies that have made their data public or replied to this author's request for such information.


An evaluation should focus on the quantity―rather than the nature―of discretionary and discriminatory restrictions in the system so as to avoid introducing bias to sectors deemed important or legitimate in accordance with a particular worldview. Different political regimes will have different views and research has the risk of being bias when it departs from a holistic analysis and moves toward a sectoral analysis in this field. Also, different economies have different natural security concerns due to their different geopolitical environments. A single set of sectoral weights thus introduces bias in the OECD methodology no matter what set of weights is chosen. Sectoral analysis that ignores actual FDI interventions is not, in this author's view, the best choice. In the OECD methodology, Japan, Indonesia, and Korea are all severely penalized for equity restrictions. However, Japan's equity restrictions are limited to national security interest sectors and have only been enforced to block investment once in the past 30 years. The US is given a screening penalty of 0.00, despite being incredibly heavy-handed within the realm of APEC industrialized economies at politically screening out FDI, though it still compares favorably with other economies. This paper thus develops a methodology grounded in discretionary investment restrictions rather than categories and complicated scoring. It is hoped that this will produce a more meaningful ranking that can serve as a reference for policymakers and investors alike.

The OECD argues that we should correlate restrictiveness with the amount of investment. However, the amount of investment depends significantly on non-regulatory factors, including the economy, market size, growth expectations, natural resources, human resources, language barriers or the absence thereof, the presence or aftermath of economic bubbles, and global perceptions of FDI openness, all of which are divorced from regulatory openness with respect to FDI. This paper's methodology deliberately excludes these measures except to consider how to scale actual FDI restrictions, because they are extraneous to regulatory restrictiveness.

Similarly, one might argue that we should judge restrictiveness based on sectors open or blocked. This author agrees that, depending on the type of investment, this can be a highly meaningful factor for a foreign individual or corporation in terms of practical ability to invest. However, it does not prevent investment in the economy at large, and there may be distributionary concerns at hand, such as in resource-rich economies' insisting that their natural resources benefit the entire population through the state. Even if these concerns are not legitimate in the particular circumstances, the group who has the concern is politically powerful enough to block the sector off, so the concern is at minimum significant in the context of domestic politics and stability. Also, as mentioned above, differing geopolitical situations and development status make sectoral blocking open to significant external factors that are muted in the discretionary context; that is, a government's political decision that a sector is so important as to block all foreign investment is extreme enough that it legitimizes the underlying geopolitical interest. A pick-and-choose approach suggests that the danger (whatever the danger) is less significant, and so any regulatory action is more suspect. It also mitigates some of the structural issues that make comparisons between developed and developing economies rather useless by allowing comparisons between similar processes rather than entirely divergent systems.

The table below provides examples of comparing the self-reported government stance to data pertaining to the discretionary quantitative blocking for the original five industrialized APEC member economies. We note that the number of investments blocked may not always directly correspond to regulatory restrictiveness. For example, economies with greater emphasis on military research or other sensitive industries might legitimately block more investments while classifying their regime as open. However, that depends on whether the investments blocked actually qualify as being sensitive, as well as the economy actually being quantitatively different in the fraction of GDP devoted to such research.

APEC member economySelf-reported classification
(APEC CTI Investment Guide)
Quantitative blocking
United States"It is the policy of the United States government to regulate foreign investment as little as possible."

"The United States continues to offer [a stable, non-discriminatory policy and regulatory] investment environment ..."
Blocks at least two to three investments via CFIUS each year, as well as others through political interference separate from the CFIUS process. Still, the quantity is relatively small in the global context.

E.g., blocked a Dubai group from purchasing a port for political reasons widely recognized as not related to national security.
Japan"Japan encourages and welcomes foreign direct investment."

"Japan does not have a screening process per se for inwards FDI. Japan has a highly liberalized and open investment regime, and in principle, ... requires only ex post facto reporting."
Has blocked one transaction in the past 30 years, and for almost all transactions, it requires only ex post reporting.

The transaction blocked pertained to a company in the process of privatization responsible for Japan's nuclear energy policy implementation and power grid, and central to Japan's energy security strategy.
Australia"Australia recognizes community concerns about foreign ownership of Australian assets. One of the objectives of the Government's foreign investment policy (the policy) is to balance these concerns against the strong economic benefits to Australia that arise from foreign investment."Around 38 transactions are blocked per year, and around 4,000 have conditions attached to proceed. A significant portion of restrictions relate to real estate, an extremely complex issue in Australia related to having large land areas relative to the population as well as complex laws surrounding indigenous peoples' rights. Nonetheless, the quantity is massive for an industrialized economy of its size. The government does not, however, claim to be completely open in its report.
New Zealand"New Zealand has a very welcoming and open attitude toward inward FDI, which is frequently reiterated in public statements by Government Ministers and officials. New Zealand welcomes and encourages foreign investment from all countries without discrimination. This is reflected in the nature of the Government's foreign investment policies."Blocks transactions at roughly the same rate as the United States, despite the fact that New Zealand's size, economy, geography, and geopolitical environment is completely different.
Canada"Canada welcomes, and indeed actively seeks, beneficial foreign investment."Blocked only two foreign takeovers between 1998―when their investment law was created―and the present. One of these blocked takeover attempts was an American company that tried to buy a Canadian space company.

As of this writing, political pressure has successfully brought to bear against a merger between BHP Billiton and Potash Corp., a corporation said to be of strategic importance by Saskatchewan province for its role in fertilizer.

Also, the following chart shows this author's ranking of APEC industrialized economies by openness to foreign investment in the most important sense, i.e., whether they block foreign investment. This is a subjective ranking in the relative position of the bottom three, since one could argue for any order among them depending on what one chooses as the denominator―GDP, population, some inverse correlation with land area, or other factors, for example. However, APEC industrialized economies can be divided into two brackets based on FDI restrictive enforcement: highly free economies (Japan and Canada), and less free economies (the United States, New Zealand, and Australia). Japan has had only one and Canada has had only two blocked incidents in 25 years, and the other three countries have had dozens or even hundreds. New Zealand fares better than the United States and Australia in this analysis because, other than in 2008, it did not block any significant transactions but rather just smaller transactions focused on real estate. From the perspective of a major investor not focused on real estate, New Zealand, Japan, and Canada all have nearly negligible blocking risk, while the United States and Australia have more significant risk. From the perspective of a real estate investor, Japan, Canada, and the United States have negligible risk, while New Zealand and Australia have low-probability but significant risk. Japan may be poised to join the New Zealand and Australia group on real estate, as discussed below in detail. Canada may be moving down toward the United States' position given that both transactions that it blocked were in recent years, so they may represent an emerging trend. If this becomes a pattern and New Zealand stays relatively silent on transactions, it could overtake Canada in the rankings.

3New Zealand
4The United States

The OECD Code of Liberalisation of Capital Movements

The OECD Code of Liberalisation of Capital Movements (the "OECD Code") requires, subject to reservations which are also published in the code, that all members grant "any authorisation required for the conclusion or execution of transactions and for transfers specified" in a list, which includes "direct investment" and "operations in securities on capital markets," in particular the "purchase of shares or other securities of a participating nature."(i)

However, the OECD Code thereafter provides that this shall not prevent a member state from taking action it considers necessary for the "public order or the protection of public health, morals and safety," "the protection of its essential security interests," or "the fulfillment of its obligations relating to international peace and security."(ii) What exactly these phrases mean, particularly the first two, is not well-defined. In the EU, there are some European Court of Justice rulings that bear on the meaning of public policy and security, and these rulings bear on the interpretation of these phrases within that economic zone. However, no APEC economy is part of the EU, so interpretation could vary considerably within OECD APEC members. In practice, what they mean boils down to a political judgment by legislators, cabinet members, or other public figures with authority to make or influence decisions on FDI in a jurisdiction.

This OECD Code is binding on Australia, Canada, Chile, Japan, Korea, Mexico, New Zealand, and the United States, which helps explain why the wording of their respective laws permitting their governments to intervene in such a transaction closely mirrors each other and the Treaty.

A. Australia

Australia's FDI regulations require permission for a wide range of sectors, and their regulatory body rejects numerous applications each year, though a small fraction of the total. The government publishes an annual report detailing application numbers and outcomes, from which we draw the following data:

Australia's FDI permission application data
Approved995 (22%)1,127 (25.5%)1,386 (26.5%)1,520 (24.5%)1,656 (21.1%)2,266 (29.7%)
Required conditions3,452 (76.5%)3,233 (73.2%)3,800 (72.8%)4,637 (74.8%)6,185 (78.7%)5,352 (70.2%)
Rejected64 (1.4%)55 (1.2%)37 (0.71%)39 (0.63%)14 (0.18%)3 (0.039%)

One major source of applications, and rejections, is real estate. Australia requires permission for real estate purchases by foreigners and foreign entities. Also, Australia has an extremely complex legal system surrounding indigenous peoples' rights in land and profits flowing from the land that add layers of risk to any mining transaction. Nonetheless, even taking these issues into account, Australia would appear to rank as significantly more restrictive than the United States, Canada, New Zealand, or Japan in its government's position on foreign investment. Australia has achieved a significant reduction in rejections, and though it has also seen an increase in required conditions in absolute terms, in percentage terms, not much has changed convincingly apart from the reduction in number of rejections.

B. Canada

Canada is a signatory to the OECD Code. But the Investment Canada Act permits their federal government to block any transaction valued at least at 299 million Canadian dollars and not of net benefit to Canada based on productivity, employment, and economic activity. This standard's wording seems much more open to restrictive enforcement than those in the United States or Japan, but Canada's enforcement more closely mirrors the liberal Japanese regime than the restrictive American one, particularly pre-2008. Canada, like Japan, had until recently only rejected one takeover offer in the past 25 years―an American takeover attempt of the Canadian space business MacDonald Dettwiler & Associates Ltd. Statistically, this put Canada and Japan in exactly the same boat, pending the ongoing review of the BHP Billiton bid for Potash Corp.

Potash Corporation does possess control over a significant fraction of global supply for a significant resource, potash, crucial for fertilizing crops and satisfying the world's food needs. On the surface, the transaction might appear to be a potential threat to national food security. However, the company is already largely owned by non-Canadians, and the deal has been pitched as a transfer between American and Australian ownership of a Canadian company rather than threatening foreign investment that jeopardizes national security. This argument failed to satisfy Saskatchewan's governor, who spoke in terms of employment rather than security, but the government minister in charge had been more reserved in statements. This transaction was ultimately rejected by that minister on November 3rd, 2010, and this may reflect a shift in Canada's policy from one of the freest in the world toward a restrictive system like that employed in the US, where transactions are regularly stopped for political reasons. Politicizing the investment process risks deterring investment and slowing economic growth, as the advent of a percentage risk that all investment work and money spent hiring professionals to prepare for a deal would become a waste due to government intervention will have a chilling effect on the number of cross-border deals conducted in Canada. This in turn would negatively impact Canadian companies' internationalization and reduce their economic competitiveness overall.

C. Japan

Japan's Foreign Exchange and Foreign Trade Act

Japan's law allowing the government to intervene in foreign direct investment transactions is the Foreign Exchange and Foreign Trade Act. This law is not exceptional within the OECD, in part because it is covered by a binding OECD code, discussed below. Its application is also not exceptionally hostile to foreigners when compared with other OECD members or within the APEC region, and it is on the less hostile side within both of these groupings. Japan's treatment of the only company blocked under this law ever is not the result of a system or administration which has an exceptional pattern of discrimination against foreign investors, but is instead an exception within a pattern of accepting foreign investment. This is a result of a system or administration which is relatively fairer to foreign investors than other OECD members. The application in the J-POWER case must reflect some policy judgment of METI, MOF, or the Japanese political leaders at the time, since there is no pattern of discrimination to note.

The law under which investors file notice of intent to increase their holdings in situations where such filings are required is Article 27 of the Foreign Exchange and Foreign Trade Act (in this Section, the "Law"). This Law requires, among other things, that when a "foreign investor"(iii) would engage in a transaction which may be considered foreign direct investment(iv) (below, "FDI") it must notify the minister with jurisdiction over the business and the Minister of Finance (the "Ministers") of its intent to do so.(v) If there is no response within 30 days, the foreign investor may proceed, unless the ministries need more time to confirm whether the transaction is the sort of FDI described below, in which case the period may be extended for up to four months.(vi)

FDI subject to such delay and restriction is defined as (for investors from a signatory country to an FDI treaty):

  1. FDI which may compromise national security, prevent the maintenance of public order, or hinder the protection of public safety by a foreign investor covered by a treaty or other international agreement that promotes FDI liberalization but does not prohibit the use of restrictions; or
  2. FDI which may have an extremely negative influence on the smooth operation of Japan's economy.

The Ministers may recommend a change in the content of said FDI or recommend that it be halted in accordance with administrative regulations after listening to the opinion of the Council on Customs, Tariff, Foreign Exchange and Other Transactions, provided that they make their recommendation between the date of the notification and the expiration of the period, including any extension.(vii) If they make such a recommendation, the foreign investor must notify the Ministers within ten days whether it will comply with the recommendation, and if the foreign investor's answer is that it will comply, it must comply.(viii) If the foreign investor fails to answer or answers that it will not comply, the Ministers may order it to comply.(ix)

The Act on Foreign Capital of 1950, the previous law governing FDI, introduced a permission-required system for FDI. Following Japan's joining the OECD in 1974, related regulations were liberalized in stages between 1967 and 1973. This was followed by an expansion in the scope of liberalization to additional industries. In 1979, the Act on Foreign Capital was abolished and integrated into the Foreign Exchange and Foreign Trade Act and, with this, the system's operating principle was changed from permission-required (prohibited by default) to advance notice (open by default). In 1985, a same-day processing system was introduced so that other than certain specific industry sectors, investment was possible from the day of notification. The overall system was changed from advance notice to ex post notice in 1992, except for industrial sectors implicating national security concerns and a few excepted industries (agriculture, forestry, water, leather, oil, and mining), which remained subject to an advance notice requirement. The mining industry switched to ex post notification via a revision to the industries subject to a notice requirement in 1999. Finally, in 2008, it was made explicit that industries tied to national security concerns and thus requiring advance notice include general purpose goods, as they can have a high probability of conversion to military use.

Since there is only one case in which the Law has been applied, this paper briefly analyzes the case, wherein the Children's Investment Fund (TCI) attempted to increase its holdings in J-POWER, a company then in the process of privatization and which plays an integral role in Japan's national energy policy and supply. TCI filed notification under the Law on January 15, 2008, and the Ministers recommended TCI halt its planned transaction on April 16 because it was determined to be FDI which may compromise national security.(x) TCI turned down this recommendation on April 25, and on May 13, the Ministers ordered TCI to comply with their recommendation.(xi) TCI then opted to accept this order rather than initiate court proceedings to question its validity. All previous such cases were accepted in 30 days, making the J-POWER/TCI case the first case in which an extension was necessary and the first case in which one was recommended and ordered to halt under the Law.(xii) The order cited the OECD Code as well as Japanese law in explaining its legal reasons, in addition to energy security reasons. J-POWER is, among other things, responsible for a significant amount of power sourcing for Japan's regional power companies, connecting 50 Hz and 60 Hz areas of Japan's national energy grid, and the construction of the first MOX reactor in the world. Thus, it performs a state monopoly-type role in the energy sector and an important structural role in the energy sector nationwide, a sector generally considered important to national security. That the Ministers came to the conclusion that the Law may be applied to prohibit this particular transaction is thus very much within the range of possibility in any economy, and in this paper's estimation would have been blocked in any other APEC industrialized economy without question. That the transaction was blocked may reflect common sentiments among economies' political or bureaucratic leadership about foreign investment in companies owning crucial infrastructure and businesses on which domestic energy security policy is founded. Whether one considers these sentiments to be rooted in populist protectionism or genuine national security concerns is a matter of personal opinion. Our view is that the result in Japan is not fundamentally more discriminatory toward foreign investment than any other economy. In fact, the data show that Japan is the most open APEC industrialized economy to foreign investment in terms of discretionary enforcement.

Japan is currently exploring, however, a new protectionist system for real estate. Currently all foreigners and Japanese citizens, as well as Japanese and foreign companies, are on equal footing in governmental permission to acquire real estate as no discriminatory laws are enforced at present. Japanese domestic political considerations from Chinese and Korean claims to areas that Japan considers to be its own territory have led to widespread fear that Chinese and Korean citizens and companies will buy land in various disputed parts of Japan and attempt to secede or switch allegiance to a foreign country. Prime Minister Kan responded to these fears recently, stating that he would like to carefully study the issue and respond.(1) A parliamentary study group has been set up with a view to developing a new law to supplement the Taisho era law on the subject which has never been enforced. This new law might include, in addition to disputed territory, forests and agricultural land deemed important to Japan's national security. The potential that this law could be enacted represents potential that Japan could slide backward toward Australia or New Zealand in its enforcement on foreign investment, at least in the area of real estate, if not the general investment arena.

The rationale behind the proposed law appears flawed and nonsensical, purely a political charade akin to the Dubai-Port of LA CFIUS matter in the United States. If the fear is that people loyal to Korea and China will buy the land and secede, that fear cannot logically be limited to non-citizens. Japanese communists could, in theory, act as they did in the 1960's with admiration for the North Koreans. More practically, determined Korean and Chinese citizens living in Japan as permanent residents, a significant portion of the group targeted by this political fear, could naturalize, buy the land, and do the same things they could under the current law. Still more fundamentally, the act of buying land under Japanese law recognizes Japan's sovereignty over its land, since the ownership right is meaningful only under Japanese sovereignty. To buy the land under Japanese law is antithetical to Korea or China's territorial claims.

If this law were to be passed in any form, it would make sense only if it restricted ownership by all private persons, Japanese or non-Japanese, based on the land's critical importance to the government's policy interests. Japan's restrictions on ownership of agricultural land are similarly non-discriminatory, though in dire need of reform. If Japan is concerned that its forests or islands would be used for purposes against the national interest, it could restrict ownership to individuals rather than states or corporations in critical areas. Alternatively, it could acquire the land itself and lease it only to private persons and businesses operating in accordance with Japanese policy. There is no need, and indeed it would be counterproductive, to introduce this as Japan's primary restriction on foreign investment.

Japan at present can be legitimately proud of its openness to foreign investment, as the most open of all APEC industrialized economies and the industrialized economy most successful in achieving its Bogor Goals target of realizing free and open investment by 2010. Even so, it must remain vigilant against new protectionist measures in this space. If the foreigner-specific real estate ownership restrictions were to pass, Japan could slide backward toward New Zealand or Australia in its ranking, depending on how strictly the law is enforced.

D. New Zealand

Investors are required to obtain permission to invest in New Zealand with respect to the following:

  • sensitive land or an interest in sensitive land (e.g., by buying shares in a company that owns sensitive land);
  • business assets worth more than 100 million dollars; or
  • fishing quota or an interest in fishing quota.(2)

This permission is granted in the vast majority of cases; however, it is not granted and investments are blocked at a rate of roughly three per year, according to data for the period 2005-2009 provided by New Zealand's Overseas Investment Office. Whether three per year is high or low is debatable in New Zealand's case. New Zealand's economy is much smaller than that of the United States or Australia. However, its land mass is also much smaller, and the investments blocked have been related to productive land. The investments that New Zealand has blocked have predominantly come from developed countries, rather than from developing countries or politically threatening, non-democratic governments. Also, with the exception of 2008, they have been small investments on the order of a dwelling or a farm rather than an investment significant in the context of international trade and investment, that is, around 100 million dollars. From the data provided for the five-year period, it appears that between four and six significant investments were blocked, all in 2008. This suggests that investment restrictions in New Zealand, with the exception of 2008, are not terribly significant in practice, but they are more significant than those in Canada or Japan. Surely they are significant to the individuals affected, and may depress property values and household wealth in New Zealand, but they would not likely impact a decision on a merger unless 2008 became a representative year rather than the exception.

% Declined1.12%1.19%0.64%3.20%0.00%

E. The United States

The United States has been an active player in the regulation of FDI both historically and recently, through both administrative and directly political means. U.S. law on FDI has a long history that has been treated extensively in English in various publications. However, for purposes of comparison, we must answer the following questions: How frequently has the U.S. administrative and political apparatus blocked foreign direct investment over a relevant and comparable span of time and for what reasons?

The Committee on Foreign Investment in the United States (CFIUS) is the administrative committee set up to investigate FDI which may pose a threat to national security in the United States. CFIUS as an entity finds its legal authority in the Defense Production Act of 1950 (as amended), which via the Exon-Florio provision of 1988 allows the President to delegate his authority to CFIUS via executive order and the Secretary of the Treasury via regulations. This amendment was made in 1988 due to protectionist fears surrounding Japanese investment in U.S. companies, particularly Fairchild Semiconductor in Silicon Valley. Procedurally, companies which will be acquired by a foreign investor are to notify CFIUS voluntarily, and CFIUS then has 30 days to authorize the transaction or begin a statutory investigation. Next, if CFIUS chooses to investigate, it has 45 more days to decide to permit the transaction or order divestment. During CFIUS' review, Senators from states where the relevant business has factories or other places that are expected to be closed or involve the loss of employment often exert tremendous public pressure to prevent or restructure the transaction, both through public statements and by interacting with CFIUS committee members. The CFIUS regulations prior to December 2008 had a 10% threshold for voting power to be considered relevant to corporate control. The new regulations have more complicated thresholds for control, but these changes came into effect after the most recent APEC-wide self-reporting exercise.

CFIUS membership at the times relevant for comparison included the Secretary of Homeland Security, the Secretary of State, the Secretary of the Treasury, the Secretary of Defense, the Secretary of Commerce, the United States Trade Representative, the Chairman of the Council of Economic Advisers, the Attorney General, the Director of the Office of Science and Technology Policy, the Assistant to the President for National Security Affairs, the Assistant to the President for Economic Policy, and the Director of the Office of Management and Budget. The Chair was the Secretary of the Treasury.(xiv) CFIUS is thus a collection of political appointees, and ultimately the decision-making authority falls with the President. Ultimately, all the power in CFIUS' decision-making process is held by the President and by those to whom the President has delegated authority; it is a purely political process.

The CFIUS website provides information on how frequently transactions were prevented via the CFIUS process. Because the President holds all the cards in the CFIUS process, once the view of the political establishment on a transaction has been made clear, there is no point in continuing the process if the potential investment seems on course to be rejected. In theory, for the President to block or divest a transaction, the President must determine that: (1) there is credible evidence that leads the President to believe that the foreign interest exercising control might take action that threatens to impair national security, and (2) law other than the Exon-Florio amendment and Emergency Economic Powers Act do not in the President's judgment allow the President to adequately protect national security.(xv) These two conditions are both processes that occur entirely within the President's opinion, so they may add nothing substantial to what is entirely a subjective political judgment. As a result, once the President or a sufficiently powerful politician has made their negative view of a transaction clear, the transaction is often amended to try to get the politician to change their view or assure them that their constituency will be protected, or the transaction is abandoned entirely. The President ordered a divestiture in only one case―an investment in an aircraft parts manufacturer, MAMCO Manufacturing Inc., held by the China National Aero-Technology Import and Export Corporation―on February 1, 1990.(xvi) The reason is that the consequences of divestiture are catastrophic enough that in essentially all cases transacting parties file their CFIUS notices and wait for the process to conclude or withdraw if it is going badly. That said, by the point a transaction has been submitted to CFIUS for a review, a substantial amount of investment in terms of businesspersons' time and legal costs have been committed to the project, and the CFIUS review period is relatively brief, between 30 and 75 days plus the time it takes for the President to issue an order, so nominally one to three months.

The U.S. Treasury has released CFIUS data for the three years from 2006 to 2008, which is presented in the following table:(xvii)

Covered Transactions, Withdrawals, and Presidential Decisions, 2006-2008
Number of Notices111138155
Notices Withdrawn During Review141018
Number of Investigations7623
Notices Withdrawn During Investigation555
Presidential Decisions200
Effective percentage declined6.31%3.62%3.23%

These data, however, do not capture those transactions for which notice was withdrawn because the parties were abandoning the transaction. We submit that a transaction withdrawn during the investigation period is reasonably likely to have been withdrawn due to a negative view expressed by a politician or CFIUS given the timing and unusual situation. During this period, the U.S. economy experienced massive investment and almost universally rising asset prices. However, it is impossible to ascertain the precise reason why a transaction was withdrawn merely from the publicly available data, so perhaps some of these transactions were withdrawn for other reasons, such as the financial crisis for late 2008, the results of due diligence, or a breakdown in the negotiations between the parties. The above data also do not capture transactions in which CFIUS made an agreement with the investor in which the investor was forced to make certain concessions to allow the investment to proceed. Those data are contained in the annual report CFIUS makes to Congress, summarized as follows:

YearNumber of NoticesNumber of InvestigationsTransactions Abandoned, likely as a result of CFIUSTransactions allowed following mitigation measures
20071386212 (within this figure, there were two separate mitigation agreements for a total of 14)

The 2006 numbers are unclear due to the absence of an annual report covering that year separately. Also, it is unclear how many transactions the 15 mitigation agreements in 2006 covered. However, given that the numbers in 2006 are otherwise very similar to those of 2007 and no major changes occurred in the laws or regulations in-between, it seems reasonable to assume they are about the same as 2007. Therefore, in this three-year period, the CFIUS process reviewed 404 transactions, found it necessary to conduct 36 investigations, forced approximately 26 companies to make concessions in what they can do with their investment to complete their transaction, and halted about seven transactions directly, and, in our estimate, around 27 in total through combinations of political pressure and pressure from investigations.

One of the notices withdrawn in 2006 was DP World, a Dubai company, which sold off its U.S. port holdings as a result of congressional scrutiny during the CFIUS process.(xviii) DP World was acquiring a UK company that controlled several major U.S. ports. The DP World incident followed the notorious CNOOC incident in 2005, when CFIUS and congressional pressure led CNOOC to withdraw its bid for Unocal. The Foreign Investment and National Security Act was signed in this context in 2007 and expanded the number of notices slightly and investigations significantly, as well as factors relevant during the investigation.(xix) One commentator assesses FINSA somewhat favorably, claiming that "from the prospective of foreign investors, the review process became more predictable and less politicized, though often more rigorous." However, looking at the same data, we are skeptical of this claim: in 2007 and 2006, the periods for which data are available and which are prior to FINSA implementation, once an investigation began, essentially all expectations for a transaction to proceed were lost and the foreign investor would almost always withdraw (seven of seven in 2006, five of six in 2007). In 2008, however, only five of 23 investments collapsed under the pressure of a CFIUS investigation. From this very limited set of data, it would appear that the CFIUS process became unpredictable and less rigorous as a result of FINSA, at least in the sense that rigor leads to the likely blocking of an investment. Also, restricting the role of Congress does not reduce politicization in a process which still involves only political figures and appointees; it merely reallocates the political power to be more exclusively the domain of the President and political appointees by taking Congress out of the equation. At best, it mitigates more publicized politicization, the kind that makes public the extent to which the U.S. succumbs to protectionist interests and anti-foreigner sentiment blocks foreign investments.


APEC industrialized economies (as a group) have relatively small numbers of discretionarily blocked foreign direct investments. However, when a large transaction is blocked, as it has been in each and every economy over the past five years, and in every case apart from Japan more than once, it can damage businesses' confidence in their ability to make an investment. This uncertainty in and of itself is destructive to valuation, and it would be best for each industrialized economy to follow Japan's example and avoid unnecessarily politicized investment restrictions. Japan also needs to hold firm its line on openness to foreign investment as economies around the developed world face increasing political pressure to return to protectionism due to high unemployment. This is a matter ultimately in the hands of politicians, but to enable politicians to do the unpopular but correct thing, bureaucracies can be structured to make the process far removed from the political process. We urge all APEC economies to bear this in mind when an opportunity for reform presents itself.

  1. Sankei Shimbun, news broadcast at 8:57 PM on Friday, October 15, 2010.
  2. http://www.linz.govt.nz/overseas-investment/need-consent-invest/index.aspx
  1. Article 2(a) and Annex A, List A(I)&(IV)(C)(1)(a), The OECD Code of Liberalisation of Capital Movements, available online as of January 20, 2011 at http://www.oecd.org/dataoecd/10/62/39664826.pdf. As relevant to direct investment and purchase in the country by non-residents: Germany has List A reservations for Direct Investment including for depository banks, airlines, German flag vessels, the broadcasting sector, and mutual funds in certain circumstances; Japan has List A Direct Investment reservations for primary industries related to agriculture, forestry, and fisheries, mining, oil, leather and leather product manufacturing, air transport, maritime transport, and investment in NTT greater than one third; the United Kingdom has List A reservations for Direct Investment including for depository banks, airlines, UK flag vessels, the broadcasting sector, and mutual funds in certain circumstances, and an extensive list regarding Bermuda and the Channel Islands; and the United States has List A reservations for Direct Investment including for atomic energy, various broadcasting licenses, air transport, maritime shipping, ocean thermal energy, hydroelectric power, geothermal steam or related resources on federal lands, mining on federal lands or on the outer continental shelf or deep seabed, fishing in the “Exclusive Economic Zone,” and deepwater ports except through U.S.-incorporated enterprises. Id. at Annex B. None of these reservations appear to apply to J-POWER, except in the United States regarding direct investment in atomic energy.
  2. Id. at Article 3.
  3. Defined in Article 26 of the Law as (i) a non-resident individual, (ii) a legal person or other organization created under foreign law or having its principal office in a foreign country, or (iii) a corporation whose voting rights are 50% or more held, including directly and indirectly, by entities falling under (i) or (ii).
  4. Situations considered to be FDI are enumerated in Article 26 Item 2 of the Law and includes, among other things, the purchase of shares listed on relevant securities exchanges (OECD Code List A(IV)(C)(1)(a)).
  5. The Law, Article 27(1).
  6. Id., Article 27(2), (3). The ministries may also shorten the period as appropriate. Id., Article 27(2) and (4). Also, the period may be extended to 5 months if the Council on Customs, Tariff, Foreign Exchange and Other Transactions finds it difficult to provide its opinion within the 4 month period.
  7. Id., Article 27(5).
  8. Id., Article 27(10), (11).
  9. Id., Article 27.
  10. METI press release issued April 16, 2008, available online as of January 20, 2011 at www.meti.go.jp/press/20080416002/03_kankoku.pdf.
  11. Public notice and relevant texts may be found online at MOF's website as of January 20, 2011 at http://www.mof.go.jp/jouhou/kokkin/tci20080416-01.htm (Japanese)
  12. Y. Shimoi, “The First Halt Order Based on the Foreign Exchange Law: About the Case of the TCI Fund's Additional Acquisition of J-POWER Shares,” (初めて発動された外為法に基づく中止命令~TCI ファンドによるJ パワー株式の追加取得の事例について), MOF publication The Finance (ファイナンス), Dec. 2008 issue. Available online as of January 20, 2011 at: http://www.mof.go.jp/finance/f2012e.pdf; data the Ministry of Economy, Trade & Industry provided in hard copy upon request.
  13. (Pre-FINSA) Treasury Regulation § 800.302.
  14. Executive Orders 11858, 12661, 12860, and 13286. Executive Order 13456 further amended CFIUS' membership, but it occurred after J-POWER and did not change the membership far afield from what it was before, a collection of political appointees.
  15. Exon-Florio Amendment, 50 U.S.C. app 2170 (d) (4).
  16. General Accounting Office, GAO/T-NSIAD-90-21, available online at http://archive.gao.gov/t2pbat11/140886.pdf as of January 20, 2011
  17. Available online as of December 22, 2009 at http://www.treas.gov/offices/international-affairs/cfius/docs/Covered-Transactions_2006-2008.pdf
  18. E. Graham et al, U.S. National Security and Foreign Direct Investment, 136-139.
  19. Foreign Investment and National Security Act of 2007, Public Law 110-49, 121 Stat. 246 (amends the Defense Production Act of 1950).