State Owned Enterprises and Investment Canada

Two recent arguments about the screening of foreign investment by Investment Canada are lack of transparency, and the need for special procedures to review acquisitions by foreign state owned enterprise SOEs.

1. While there may be the need for minor amendments to the review process, the general criticism fails to understand how the screening
process works, and how the proposed changes can weaken the policy. By making the screening procedures more rigid, it will become easier to work around them, and by trying to treat SOEs differently, it will be necessary to establish guidelines creating more complexity which helps firms bypass the general effectiveness of the screening process.

Of the hundreds of individual Investment Canada decisions made to date, none have been debated in Parliament. Rather the Act giving the power to review investments was debated and passed in 1985, and successive governments have reported annually on the decisions made. Todate, details of the commitments by a foreign investor are not disclosed publicly. Those proposing change appear not to have read the extensive material published on the IC website. One case reports on a commitment which the government later challenged.

Whatever commitments an investor makes cannot always be fulfilled if underlying conditions change. If an investor committed to maintain or increase investment in Canada and there was a 2008-type recession, the firm might not be able to live up to this commitment.  Canada would have the option of asking the foreign firm to leave, thereby increasing unemployment or renegotiate the commitment. This is what happens in an active economy with the government usually accepting the consequences of the changed conditions.

The suggestion that the IC rules for foreign investment should be redrafted to create greater certainty reveals a misunderstanding of how economic adjustments occur. In the medical arena, a starving patient can commit to a doctor today to eat a healthy diet including sugar, but if later she becomes diabetic the diet will make her sicker and perhaps kill her. Some degree of future flexibility has to be incorporated into any set of circumstances which change over time. Thus drafting new policies re investment commitments may do more harm than good. The more rigid the commitments required, the easier it is to find a way around them.

2. The CNOOC case involves a state owned enterprise. Should there be special rules for them? Not all SOEs are the same. There is probably little concern about investments in Canada by the Norwegian government’s sovereign wealth fund, and foreigners have little concern about investments made by the Alberta Heritage Fund. But people become uncomfortable when a SOE from a communist country invests in Canada and other free market economies.

Similar to the treatment of foreign visitors where those from some countries require visas, it would be possible to have different rules for foreign investment by SOEs than for private investors. But then the rules would have to be further refined so that SOE investors from countries like Norway are treated differently from those from China, creating all sorts of profitable opportunities for lawyers, consultants and economists to advise potential  investors on how to structure their operations so as to gain approval for their investment.

Having separate conditions for SOEs may seem a good idea, but unless they are general and permit those screening to exercise their judgment they are likely to fail. If in the  extreme case all SOEs were banned from having a controlling interest of say 50 per cent plus equity ownership in a Canadian firm, this would seldom work. Control can be exercised with a much lower percentage, perhaps 10 per cent if the remaining 90 per cent are widely owned.

Alternatively, a banned foreign SOE might be able to control a Canadian resource deposit by having zero investment but a long term contract to buy all the resource output of the Canadian firm for the next ten years.  It would not be the same as having management control, but a main purpose of such a transaction might be achieved.

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