Mathieu Belanger
Can selling a company that some us think of as a strategic asset to non-Canadian investors deliver a net benefit to Canada? That is a loaded question, one that can spark an explosion at the intersection of nationalist sentiment, industrial strategy and political populism.
In the 1970s and into the '80s, the words "foreign investment" gained an unsavoury patina; the spectre of foreign control frightened federal and provincial governments into buying resource companies in defence, they said, of national interests and industrial policy. Ottawa was openly hostile to takeovers and taxpayers ended up owning some ungainly resource firms and much more. By the mid-1980s, however, things calmed down and Canadians in general decided that one thing worse than having foreign investment was not having enough.
But the federal government has retained the power - which it has recently flexed - to review investment in ownership and control of Canadian business assets, and to attach conditions to changes of control. If a foreigner from a World Trade Organization member country wants to buy control of a Canadian asset worth $312-million or more, Industry Canada can review the proposal.
In practice, the industry minister must be convinced that the acquisition is likely to be of "net benefit" to Canada. The Investment Canada Act gives the minister complete power to block the transaction if he doubts it will convey net benefits. That power can be politically incendiary, as we saw last year in the proposed takeover of Potash Corp. of Saskatchewan, and now in the case of a proposed London-Toronto stock exchange merger.
The law guides the minister on how to test if a transaction fits into Canada's overarching industrial strategy, from employment to technology national economic policies. But the list of factors is so expansive that it fits everything and nothing, and hence is a compliant vessel for shifting concepts such as a strategic asset. To call something a strategic asset, these days, is to lay a trump card on the policy question of whether its sale would deliver a net benefit to Canada.
A business manager knows a strategic asset when he sees one. Whether it is a patent, a unique manufacturing facility or access to a natural resource, the asset is something to be cherished, acquired and husbanded. These assets can deliver a strategic, competitive advantage to the manager, to the company, to its shareholders, employees and customers.
But the business concept does not travel well to the policy arena. To be a public-policy matter, the asset in question must be one that yields a public good to Canada if it is owned or controlled by Canadians - and would not, if it were owned or controlled by foreigners, as in the case of some national security or defence-related assets. Framed in the language of public economics rather than business strategy, the case for blocking a transaction becomes more difficult to make.
When it comes to exploiting natural resources, for example, the public gets benefits from companies paying for leases, taxes and royalties while complying with laws and environmental regulations. These powerful tools ensure that Canadians derive the benefits of resource extraction, but they are not closely linked to the majority shareholders' place of residence. That is why we have become relatively unconcerned about foreign investment in the oil patch.
And it's hard to see why we should be concerned about who controls ownership of the major domestic stock exchange. Canadian governments will still oversee regulation of the securities business. Investors and issuers will go where there is good infrastructure and suitable regulation. Ownership of an exchange may be a strategic matter to someone, but it isn't an obvious public policy issue.
So how to give legislators some distance from business decisions with nationalist overtones? In 2008, the Competition Policy Review Panel had some good recommendations. One was to raise the dollar amount of the review threshold - by a lot. That would take the federal government out of some arguments it doesn't need to be in.
Another suggestion was to flip the onus: Amend the law so that if the minister wants to block a proposed foreign investment, he would have to prove that it would be injurious to Canada. That is surely the sort of treatment Canadian investors would want if they pursued foreign opportunities. We should be wary treating others in ways that may come back to bite.
Finn Poschmann is vice-president of research, C.D. Howe Institute, Toronto