Does Subjectivity Improve Foreign Investment in Canada?

The level of attention and investment geared toward natural resource development in Western Canada has increased over the last several years, particularly from foreign state-owned enterprises (SOE). Concerns regarding SOE acquisitions in Canada include the perceived loss of sovereignty, in addition to uneasiness about allowing governments with questionable human rights records to profit from exploiting resources in a democratic country.

In Canada, acquisitions involving foreign buyers, including SOEs, are subject to a so-called “net benefit test,” which is defined in the Investment Canada Act. The public does not understand this process very well and it has drawn severe criticism for its subjectivity. For example, Petronas, a Malaysian resources firm, acquired shale assets in 2012 from Progress Energy in British Columbia, while CNOOC, a Chinese SOE, received permission to undertake similar investments in Canadian firm Nexen shortly thereafter. Both deals were subject to lengthy bureaucratic scrutiny.

What should the net benefit test look like and should Canadians be concerned?

It is well know that uncertainty about subjective regulatory hurdles can deter investment, potentially steering it elsewhere. In this way, the “net benefit test” could discourage foreign capital inflows. With this in mind, many have called for transparent, black-and-white criteria for investment approvals, if not scrapping the net benefit test altogether.

On the other hand, concerns surrounding SOEs seem to be driving the federal government’s insistence on subjective, case-by-case evaluations. The fear, presumably, is that an SOE tied to an oppressive government, such as China, could meet the criteria and be able to set up shop in Canada. By allowing leeway in the approval process, the federal government presumes to be able to choose whether investments are “good” or “bad.”

However, defining SOEs is a complex process. For instance, Ottawa could consider publicly traded companies that receive subsidies from a foreign government to be a private entity or it could determine that it is an SOE.

Lastly, there are political aspects that contribute to the federal government’s desire to evaluate each application subjectively. Canada is currently in the process of negotiating a sweeping free trade agreement with a group of Pacific Asian countries and it could hurt these negotiations to have rejected the CNOOC-Nexen acquisition in 2013.

In summary, the foreign investment “net benefit test” remains a topic of debate. While the regulatory subjectivity appears to deter investment, it may also provide the federal government with room to maneuver on political and human rights grounds.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

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