Foreign Investment in Canada: To Be Feared or Welcomed?

CMA Management - Vol. 81 Nbr. 8, December 2007

Young, Alan

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Summary

The recent loss of several big Canadian enterprises raises serious questions about Canada's ability to meet this challenge. It also reignites the debate over the "hollowing out" of Canadian economic sovereignty, a debate which is becoming louder and polarizing. Those who argue that corporate Canada is being hollowed out raise concerns over shrinking corporate tax revenues, fewer capital markets hstings, and the shifting from Canada to foreign-based head offices of corporate decision making that can have critically important economic consequences for Canada. But there are those who argue that the hollowing out of Canada is a myth. They note that Canadians are now investing more in other countries than the reverse, making Canada a "hollower-out" of other countries. As in most things, it is necessary to understand all sides of the story.

Before examining where government policy might go, it is useful to first examine Canada's track record in attracting foreign direct investment (FDI). FDI generally refers to an entity in one country obtaining a long-term interest in, and significant influence over the management of, an entity resident in another country. FDI comes in the form of establishing a new enterprise or, more frequently, involves a change in ownership of an existing enterprise by way of mergers and acquisitions. Canadian Direct Investment Abroad (CDIA) is the counterpoint of FDI, namely the creation of a new enterprise in a foreign country or the acquisition of a foreign entity by Canadians.

The Panel released a public consultation paper entitled Sharpening Canada's Competitive Edge on October 30,2007, and has asked for written submissions from interested parties on the issues presented in the paper by no later than January 11,2008. Among other things, the Panel is examining the "hollowing out" debate, reviewing sectors in which ownership restrictions currently exist, including telecommunications, transportation and financial services, and studying barriers to Canadian investment put up in other countries. One of the key questions it is asking is, "How can we make Canada a destination for capital and economic activity?" Two issues that were taken off the Panel's plate are how to deal with proposed acquisitions of Canadian companies by foreign stateowned enterprises, and whether the Investment Canada Act review of transactions should include a national security component. The government has expedited its consideration of these important matters.

Four hundred fifty-five Canadian companies were acquired by foreign interests between 2001 and 2006. The driver behind the quickening pace of foreign acquisition of Canadian companies is the fundamental global transformation taking place. The recent loss of several big Canadian enterprises raises serious questions about Canada's ability to meet this challenge. It also reignites the debate over the hollowing out of Canadian economic sovereignty, a debate which is becoming louder and polarizing. Before examining where government policy might go, it is useful to first examine Canada's track record in attracting foreign direct investment (FDI). FDI generally refers to an entity in one country obtaining a long-term interest in, and significant influence over the management of, an entity resident in another country. Canadian Direct Investment Abroad is the counterpoint of FDI, namely the creation of a new enterprise in a foreign country or the acquisition of a foreign entity by Canadians.