The proposed acquisition of Nexen, a Canadian oil company, by CNOOC, a Chinese state owned enterprise, has raised questions in Canada as to whether the economic and non-economic criteria for assessing foreign investment should be amended to create more certainty. Here it is argued that the nature of the investment process is such that precision is not possible, and judgment is required when dealing with such cases. This is similar to court cases where judges and juries have to use judgment in reaching verdicts on cases involving murder, assault and robbery. The same is true for Investment Canada decisions regarding foreign investment by state owned enterprises.
Three issues raised by the CNOOC proposed takeover of Nexen are:
- Will there be a net benefit to Canada in economic terms?
- Will it harm national security?
- Are there special issues related to foreign investment in Canada by state owned enterprises (SOE)?
The first question was addressed in the posting of October 26th, 2012. My view is that the evaluation of net benefit works well. It has to be left to judgment and evaluation of the facts of each case, similar to a court case. No two cases are the same and if the evaluation became more specific it would allow investors to structure their business arrangements to be in accordance with the act, while perhaps still not being in Canada’s interests. Many actions require judgment and cannot be made subject to precise rules, such as hiring personnel, testing drivers and pilots, and rating films as to viewership.
Precision regarding national security, the second question, is more difficult. On May 25, 2009, the OECD issued “Guidelines for Recipient Country Investment Policies relating to national security.” (http://www.oecd.org/investment/investmentpolicy/43384486.pdf). These concerns are often considered as political risk issues, but in many cases they have an economic dimension. Ted Moran has proposed consideration of three types of risk: dependency on a foreign supplier, leakage of sensitive technology or know-how, and infiltration/ espionage/ disruption. The three are described as follows:
“The first category (which I will refer to as “Threat I”) consists of proposed acquisitions that would make the home country dependent upon a Chinese Foreign Direct foreign-controlled supplier that might delay, deny, or place conditions upon the provision of goods or services crucial to the functioning of the home economy. The second category (“Threat II”) is a proposed acquisition that would transfer, to a foreign-controlled entity, technology or other expertise that might be deployed by the entity or its government in a manner harmful to the home country’s national interests. The third category (“Threat III”) is a proposed acquisition that would enable the insertion of some potential capability for infiltration, surveillance, or sabotage into the provision of goods and services crucial to the functioning of the home economy.”
What is labeled national security here has both a political and an economic dimension. Threat 1 implies refusal to supply by a foreign owned entity; Threat 2 refers to foreign control over knowledge and expertise to the economic and political detriment of the country; and Threat 3 dealing with infiltration, surveillance and sabotage implies political interference with economic and other consequences. The possibility of being specific when evaluating each of these three seems remote and has to be left to a judgment call. One factor which will discipline those making these decisions is that if they appear unclear and arbitrary it will limit future foreign investment in Canada by both newcomers and those already in the country.
A third issue deals with the nature of state owned enterprises and how they differ from private enterprises. Note China, which only has SOEs, already has $10bn invested in Canada, while Canada has $4.5bn invested in China. The China Daily (April 19, 2012) reports a different figure “Chinese investment in Canada surpassed $20bn in 2011.” Clarification is needed to know what is included in each total, for example, direct and/or portfolio investment. Ownership of 10% to 20% of equity can constitute control of a company.
A quick survey of state owned enterprises includes Canada’s crown corporations such as the CBC, and sovereign wealth funds like Japan ($1254bn), UAE ($620bn), Norway ($247bn), China ($298bn), Netherlands ($254bn) and Singapore ($248bn) according to the Peterson Institute in 2010. The Alberta Heritage Fund holds assets of $16bn. The differences between what are labeled SOEs are sufficient to argue that judgment is needed by Investment Canada to decide which cases to approve.