Foreign investment in Canada’s natural resource sector has been in the news a lot this year. Attention has focused mainly on big resource plays like the CNOOC-Nexen acquisition. While that deal was approved, the federal government announced changes to its foreign investment review policy, particularly aimed at foreign state-owned enterprises (SOEs). In essence, the government decided that the threshold for review by foreign SOEs would not be rising along with the general threshold and that no further acquisitions involving control of oil-sands operations would be approved.
The announcement of this new policy direction gives rise to lots of practical questions that likely won’t be answered until both the government and the private sector get a few more transactions under their belts. However, it is worthwhile to consider these developments in a broader framework and think about what this means for Canadian foreign investment policy more generally.
A good starting point is to look at the data. Remember that foreign investment – both direct (i.e. acquisitions for control) and portfolio (i.e. debt and equity purchases that do not result in a change of control) – flows in and out. Looking first at direct investment, we see that Canadians have invested about $685 billion (2011 data) abroad while foreigners have invested about $608 billion in Canada. Turning to portfolio investment, the figures show Canadian holdings of $479 billion versus foreign holdings in Canada of $885 billion.
We draw three lessons from the data. First, Canadians control significant foreign holdings, equivalent to almost $20,000.00 per person Second, foreign direct investment holdings in Canada are of roughly equivalent size, with the balance slightly in Canada’s favour. Third, there is a large imbalance in favour of foreigners in terms of portfolio investment. Interestingly, portfolio investment is what the government’s new policy seeks to encourage for SOEs investing in resource development.
Turning to the issue of SOEs, we note that Canada is home to many significant domestic SOEs. Well-known examples include the large hydro utilities (e.g. BC Hydro, Manitoba Hydro, Hydro Quebec). But the list is actually much longer. BC owns a ferry service and an insurance company. Alberta owns a financial institution. Saskatchewan owns a telephone company, a power company and an insurance company among others. The federal government owns several financial institutions (Central Mortgage and Housing Corporation, Export Development Canada, Business Development Canada) and a postal service. Finally, the federal government and the provinces control a number of sovereign wealth funds like the Canada Pension Plan, Alberta’s Investment Management Corporation and Quebec’s Caisse de Depot. A number of these funds have substantial foreign equity holdings.
Like investment by foreigners in Canada, Canadian investment abroad makes an important contribution to our economic prosperity. If we want Canadian firms to grow to be global competitors, they need foreign markets. Sometimes, the goods and services they sell need to be produced close to the foreign customer. Foreign operations create value chains for the firms’ Canadian operations and opportunities for Canadians to gain valuable foreign experience. Likewise, we want Canadian sovereign wealth funds to be well diversified. To accomplish this, they need to consider foreign as well as domestic investments. Some of those investments may require controlling interest.
What are the implications for Canada’s foreign investment review? Simply that we need to consider both the ins and the outs of foreign investment. Foreign investors won’t be the only ones to look at our regime and track record when assessing investments in Canada. Foreign governments will do the same when assessing investments in their countries by Canadians. Helping Canadian firms (including Canadian sovereign wealth funds) succeed abroad may start with the way we treat foreign investors here at home.
