FDIxSOE

As the potential closing of the deal for Chinese state-owned oil corporation CNOOC (Chinese National Offshore Oil Coorporation) to buy Canada’s Nexen approaches, debates as to the political and economic consequences intensify.

Domestic autonomy and global capital mobility may contradict each other at times.  Core to these are the liberalization of markets in general, regulation, and competing private and state interests.  Transnational financial movement and capital mobility may clash with government interests and legitimacy. Foreign direct investment puts a foreign actor in some control over domestic markets and individual enterprise.  FDI is generally beneficial to a domestic economy: it promotes growth by increasing the ratio of capital to labour, often brings knowledge to the local field, and can help to diversify investment.

The issue with CNOOC itself is first that it is not a private corporation—it is a state-owned enterprise (SOE).  Besides being shown to be less productive and efficient than private corporations, state-owned corporations are tax-exempt and largely backed by their governments, giving them an economic advantage from the start.  They are incentivized by state as well as commercial interests.  And second, these state interests become problematic because of the Chinese government’s human rights record.  According to the Conference Board, “commercial intentions are often conflated with the political objectives of the primary shareholder — the Chinese central government and ultimately the Communist party.”   CNOOC did not go through with its $18.5 billion bid on California’s Unocal in 2005 for these reasons, and because of sovereignty concerns by US officials.

The CNOOC-Nexen deal is subject to review by Investment Canada and the Competition Bureau before being approved.  The company must comply with Canadian corporate standards, as well as Canadian environmental and labour regulations.  If the deal goes through, it will provide the capital necessary for the increased development of the oil sands, and be listed on the Toronto Stock Exchange.  CNOOC has also said they will retain Nexen employees—some of the motivation for the transaction is to learn from Nexen’s management, research and development.

Foreign ownership by a state-owned company makes many uneasy.  It has been suggested that instead of allowing foreign takeovers, foreign companies should only be allowed to buy stakes in national corporations up to a certain percentage.  Maximums have been suggested from 10%-30%.  The CNOOC-Nexen deal could set a precedent for future bids by state corporations.

Canada continues to expand trade negotiations with Asia.  In February, Prime Minister Harper was in Beijing to solidify the Canada-China Foreign Investment Promotion and Protection Agreement (FIPA) with Chinese Premier Wen Jiabao.  But this agreement raises a reciprocity question: will Canada have the same access to Chinese markets, and the same opportunities to invest, as the Chinese have in Canada?

There is also the question as to whether the Canadian government or the Canadian public should have a say in private transactions.  Polls may show the public to be against the deal, but almost all of Nexen’s shareholders are for it—they would be selling at a 60% premium.  Canada may want to ensure it has a comprehensive foreign investment policy, flexible enough to deal with the complexity of issues that arise in any such deal, especially in the case of state-owned corporations.  And also to ensure that certain safeguards have been put into place to deal with possible violations of agreed-upon standards.  It is possible that in diversifying and collaborating with China from an investment perspective will promote progress on the human rights front as well as economic growth.

-Stami Zafiriou

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