Investment Canada Act’s Tradition of Ad-Hockery Continues

I was invited to appear before the House of Commons Industry Committee this week on the subject of Bill C-60, this year’s omnibus budget bill. 18 paragraphs of that long bill describe proposed amendments to the Investment Canada Act, aimed at codifying the policy changes announced by Prime Minister Stephen Harper late last year (in the wake of his government’s approval of the Nexen and Progress Energy takeovers).

It is odd that a matter this important would be dealt with in the context of an omnibus budget bill. There is little immediate connection, after all, between the working of the ICA and the government’s annual fiscal affairs.

The Industry Committee held only this one public hearing on the matter (it also interviewed Industry Canada officials in a previous session), and apparently is not empowered (since Bill C-60 is a budget bill) to recommend amendments to the legislation. So the hearing that I participated in was very much a symbolic exercise. Other witnesses (including two forceful presentors appearing on behalf of the Canadian Bar Association, Brian Facey and Joshua Crane) raised major concerns about the hurried, ad-hoc nature of these proposed changes, and called both for more time to deliberate the measures and for important amendments to the draft legislation.

But this ad-hockery, in retrospect, should not be surprising. After all, the ICA has been implemented in a completely ad-hoc manner since its inception. The effective decision rule that describes the effect of the ICA is as follows: “All foreign takeovers of Canadian companies shall be approved, unless they become too politically controversial for the government of the day, in which case the Industry Minister is empowered to reject it on any grounds he or she desires.”

As noted in my presentation, over 15,000 Canadian firms were acquired by foreign companies since 1985 when the ICA came into effect. Barely 10% of those takeovers were reviewed by Investment Canada, and all but 2 of those were approved. The two that were rejected were political hot potatoes (MDA and Potash). And the current revisions to the ICA similarly reflect an effort to manage political pressure, rather than an effort to make more effective policy. The takeover of major oil sands properties by Asian state companies became extremely controversial among Conservative supporters last year – many wondering aloud why Canada was selling off its birthright to Asian Communists. Prime Minister Harper’s odd, ad-hoc response to that controversy (approving the 2 takeovers, but announcing that none like them would be approved in the future) similarly reflected the predominance of political damage-control over deliberate economic policy-making.

We should have learned by now that designing and implementing important “foundational” policies through multi-dimensional budget implementation bills is not the best way to develop policy. We tried it once before with the ICA, through changes (including a new “national security test”) buried in the 2009 budget bill. And that’s how the temporary foreign worker program was expanded last year – and we now know how harmful and badly-thought-out that move was.

The federal government should be seriously challenged over the proposed ICA changes: not only over the nature of those amendments, but over the process by which they are being made.

Here are my speaking notes for the committee presentation (due to time constraints I read an abridged version):


Speaking Notes for Presentation to House of Commons

Standing Committee on Industry, Science and Technology

By Jim Stanford, Ph.D., Economist, Canadian Auto Workers Union

May 23, 2013

Thank you Chair and Members of the Committee for the opportunity to discuss this issue today.

I am Economist with the Canadian Auto Workers union, representing about 200,000 workers in at least 16 definable sectors of the Canadian economy – including manufacturing, resources, transportation, and both private and public services. Our union is presently engaged in a process to create a new Canadian union with our colleagues in the Communications Energy and Paperworkers union (CEP), which will come to fruition with a founding convention this August. The resulting new union will be even larger, representing workers in a broader scope of industries.

Our union warmly welcomes foreign investment if it enhances Canada’s capabilities, adds to our productive capacities, creates jobs, and accumulates real capital assets and technical knowledge. Many of our most important industries (including, obviously, the auto assembly sector) are largely or entirely foreign-owned. They have added immensely to our economic development and prosperity.

But not all the effects of foreign investment are positive. There are inherent risks and costs with any foreign takeover, including the loss of decision-making control to non-residents; the long-run payout of interest, profits, and dividends to foreign owners; and the risk that foreign investment will qualitatively shape Canada’s economy in ways that are sub-optimal.

One trend is this regard that is especially concerning has been the role of incoming foreign investment in enhancing Canada’s dependence on the extraction and export of raw minerals and resources. Incoming FDI has not only accelerated this reorientation of our economy by focusing on resource extraction and export projects. It has also mediated the unintended downside of that process: incoming FDI flows to resource projects have surely been influential in the appreciation of the Canadian dollar to levels far above its equilibrium level, thus contributing to the crowding-out of other tradeable industries (including forestry, manufacturing, services, and tourism).

We cannot simply throw open the doors to all foreign comers, in the name of being “welcoming.” We can offer an attractive package to foreign investors who are interested in truly investing in Canada (as opposed to just taking over something that already exists). But we must at the same time demand certain standards of accountability and commitment from incoming investors.

As an economist, I question the assumption that Canada inherently and generally needs foreign capital for the future development of our economy – even our resource sector. Canada is not “short” of capital in any real sense. In fact, we export capital: Canadian companies invest more FDI abroad, than foreign companies invest here. Canadian companies have access to enormous liquidity to finance their real investments – both through their internal assets (at latest count Canadian non-financial businesses held over $600 billion in uninvested cash and short-term assets – so-called “dead money”) and through the operation of a banking system that is one of the strongest in the world. The debt-equity ratio of non-financial businesses in Canada is at the lowest level in decades; Canadian firms which want to finance real capital spending clearly have abundant capacity to do so.

And especially in the resource sector, there is no indication that our capacities are constrained by a lack of know-how – that is, by a shortage of proprietary intellectual capital. To the contrary, recent takeovers of Canadian resource firms (including the CNOOC-Nexen takeover) were motivated in part by a foreign hunger for our know-how and technology.

In other industries, like manufacturing and some specialized services, a case could be made that incoming FDI provides proprietary technology, engineering and design advantages, global marketing opportunities, and other unique benefits which genuinely enhance Canadian productive capacity. It is hard to see any of those tangible benefits in the case of foreign takeovers of resource producing assets. Rather, those takeovers constitute a straight transfer of control over a non-renewable asset; the foreign investors are not building something in Canada, rather they are buying something that they hope will generate large rents in the future. In my judgment, foreign resource takeovers add no value to Canada’s economy and should normally be refused on net benefit grounds. Among other benefits, this restriction would help to correct the over-appreciation of the Canadian currency (which has been driven, in part, by current and anticipated future capital inflows to resource-related assets).

The issue of the costs and benefits of FDI was considered in detail in the CAW’s submission to the 2008 Competition Policy Review panel. I would be pleased to forward a copy of that submission to the committee for your deliberations (

The principle of a net benefit test is a valid one. It recognizes that there are costs as well as benefits to any foreign direct investment, and that those two must be evaluated. The goal of policy should be to maximize the net benefits of FDI, not to maximize FDI. But the design and operation of that net benefit test within the current Investment Canada Act is vague, opaque, and largely toothless, and the whole process is secretive, arbitrary, and hence politicized. The ICA system should thus be fundamentally overhauled.

Since mid-1985 when the current system became operational, there have been over 15,000 acquisitions of Canadian companies by foreign firms. Of those, barely one in ten – 1678 as of the end of the first quarter of this year – were even reviewed by Investment Canada. And of those, all but two were approved.

The two that were rejected (the Macdonald Dettweiler & Assoc. space division in 2008, and the Potash Corporation in 2010) had become political hot potatoes for the government. While I am glad that both were refused, our system for regulating foreign takeovers should not depend on public opinion of the day.

The President of the CAW, Ken Lewenza, wrote to Industry Minister Paradis last year in the wake of the closure of the heavy locomotive plant in London, Ont., by Caterpillar – which had purchased the plant from its former owners only months earlier. This terrible chain of events revealed the deep flaws in the Investment Canada system. (Since then, Caterpillar has closed its only other Canadian manufacturing facility – a non-union factory in Toronto.)

Mr. Lewenza’s letter outlined 5 key changes that our union proposes to the ICA. I will also forward that letter to the Committee for your reference ( The 5 changes, briefly, were:

#1 Improved Transparency: Right now the review process is entirely secretive, with Investment Canada refusing to even divulge whether an application has been received, let alone the terms and effects of that acquisition. This leaves other stakeholders (including workers, communities, and lower levels of government) entirely in the dark.

#2 Stakeholder Input: All stakeholders must have ability to provide their input to the foreign investment review process, through public hearings or other consultative mechanisms.

#3 Tightening up Loopholes: The current $340 million acquisition threshold is too high and should not be raised for any acquisition – not just for state-owned enterprises. Indirect acquisitions should also be fully reviewable by the Investment Canada process if they meet the other criteria for review.

#4 Defining and Measuring Canadian Costs and Benefits: This is perhaps our most important recommendation. The current ICA system provides no detail, transparency, or verification regarding how the costs and benefits of incoming foreign investments are to be contemplated, measured, and compared. The new legislation should recognize the many dimensions of cost-benefit analysis affecting foreign investments.

#5 Imposing and Enforcing Commitments and Conditions: An appropriately pro-active government would have many opportunities to negotiate commitments from the incoming investor that would enhance the net benefits to Canada. These commitments, once attached to an approved acquisition, must be divulged and be subject to a more genuine enforcement process (including the imposition of financial penalties up to and including annulment of the acquisition).

In contrast, the changes to the Investment Canada system proposed in this budget implementation legislation do not satisfactorily address any of these issues. The focus of the relevant portions of Bill C-60 is to establish a differential process for foreign state-owned corporations – including a lower threshold for review, and broad and arbitrary provisions regarding how foreign state-owned enterprises are identified, and how it is determined whether they have attained effective control of a Canadian firm.

This approach is rooted in an assumption, unjustified in my view, that privately held foreign companies will act in ways that are fundamentally more compatible with the Canadian public interest. I do not think we should trust a foreign privately held corporation to act in line with Canadian interests, any more than a publicly-owned company. The threshold for review under the ICA should not be raised for any type of acquiring firm. The arbitrary focus on state-owned enterprises contained in this legislation, misses the bigger problems with the existing Investment Canada system. The new provisions in Bill C-60 would clearly give the Minister more flexibility and authority to reject future takeover applications from state-owned or state-influenced companies in the future, but in a way that actually enhances the opaque and arbitrary functioning of the current system – rather than fixing those fundamental weaknesses.

Finally, in concluding, I would suggest that in light of the important, lasting effect of the measures being contemplated here, their complex nature, and their lack of direct connection to government revenues and expenditures, it may not be appropriate to consider these measures within the context of a broader budgetary implementation bill. After all, that is how the last set of changes to the Investment Canada Act were considered and implemented in 2009 – and we already know those changes were not adequate to the task at hand. I believe that a more thorough and careful consideration of the costs and benefits of foreign direct investment in the current global context, through a focused stand-alone legislative initiative, would be more appropriate.

With that I thank you for your attention and would be pleased to entertain your questions and comments. Thank you.

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