Glen Hodgson is a senior fellow at the Conference Board of Canada.
Invest in Canada, the new federal agency to attract foreign direct investment (FDI), is a positive step forward, because it creates a centre of expertise that can align with initiatives by major cities, provinces and other parts of the federal government. To accompany a new agency, Canada should undertake a timely rethink of the Investment Canada Act, with primacy given to protecting national-security interests.
There are many dimensions to Canadian FDI policy that are complex and misaligned. In many prominent cases, specific regional or industrial concerns collide with broader national economic interests, and emotion threatens to crowd out evidence and thorough analysis. Kinder Morgan’s prospective investment in the expansion of the Trans Mountain pipeline is the latest test case of the overall coherence of Canadian policy related to foreign investment.
Canada has a long and complicated history with FDI. Protectionist thinking in the 1960s and 70s led to the creation of investment-review legislation to blunt the impact of U.S. ownership and domination of Canadian manufacturing and resources. More recently, some high-profile cases have involved the possible acquisition and investment by Chinese state enterprises and private companies in Canadian firms.
Extensive research by the Conference Board confirms that FDI is critical to building global value chains and ensuring Canadian firms can reach global markets. FDI usually brings advanced technology, systems and management to the Canadian market, often with higher levels of productivity and related higher compensation and benefits to the workforce.
In the latest Conference Board report card on Canada’s economic performance, published in 2017, Canada ranked 6th among major Organization for Economic Co-operation and Development (OECD) member countries on inward greenfield foreign direct investment (FDI) performance, an improvement over the past decade. However, only three provinces – British Columbia, Ontario and Quebec – had a comparable performance score to Canada as a whole.
Canadian direct investment abroad (CDIA) allows companies based in Canada to gain access to overseas markets, resources and opportunities to exploit their competitive advantages to the fullest. Governments often have a hard time embracing CDIA in public statements, lest they be accused simplistically of “exporting jobs.” Business-development programs and risk-management initiatives in support of CDIA quietly proceed, but with limited fanfare.
Major Canadian cities have shown leadership in building a more co-ordinated approach to attracting foreign investment from places such as China and Europe, as well as the United States. The federal government is building on this city-led initiative and enhancing its own capacity to deliver on efforts to attract foreign investment. To achieve full effectiveness, that agency should operate with a governance model that provides degrees of freedom from core government.
Yet, the Investment Canada Act remains in place as a speed bump for many possible FDI transactions, perhaps creating the impression that the left hand and right hand are out of sync. Efforts have been made over the decades to relax elements of the legislation, such as investment amounts and specific sectors subject to review. But the core test is defined in the Act as “net economic benefit” to Canada, which is a vaguely defined notion that seems increasingly outdated in a globalized world economy.
Only with regular public review can we have confidence that the Investment Canada Act is still asking the right questions and regulating the right investments. For example, the overall scale of foreign investment, and possible competitive impacts, arguably could be guided by competition law, rather than an FDI review filter.
As a number of recent cases have shown, protecting our national-security interests is arguably the most critical policy issue today for investment flowing into Canada. National security is especially exposed to risk from possible investment from China, Russia and other countries where there is a close and often murky relationship between business actors and state political interests.
Under the Investment Canada Act, there is no definition of “national security.” In our view, it is time to examine giving explicit priority to a well-defined national-security test. This review mechanism would assess whether foreign governments, or their state-owned enterprises, should secure access to Canadian technology, intellectual property, markets and talent, based on an assessment of Canada’s long-term interests. The legislation could also be modernized to make explicit the criteria being applied to determine whether a proposed investment should be approved or disqualified.