CHINA
23 April 2015
Foreign direct investment in Canada: mixed messages
Canada’s share of global foreign direct investment is decreasing, with government policy and a sense of unpredictability pervading the investment landscape.
Canada’s share of global foreign direct investment (FDI) is decreasing, with government policy and a sense of unpredictability pervading the investment landscape.
Historically, FDI has always been a part of Canada’s development. UK investors financed railways, canals and other infrastructure. American industrialists built lumber mills, mines and manufacturing factories. Even today, foreign investors control about one-quarter of Canada’s non-financial corporate assets, according to Canadian government estimates.
“Canada is a country that was built on the back of inward FDI,” says Glen Hodgson, senior vice-president and chief economist at think tank the Conference Board of Canada.
The US remains Canada's most important investor, with its C$352.1bn ($277bn) accounting for 51% of the total stock of FDI in 2013, based on Canadian government statistics. "US investors are attracted to Canada's strong economic fundamentals, its proximity to the US market, its highly skilled workforce and abundant resources," says the US Department of State's 2014 investment climate statement.
US companies with large investments in Canada include automakers General Motors, Ford and Chrysler; energy, chemical and mineral companies ExxonMobil, Chevron and ConocoPhillips; financial services firm Citibank; and retailer Wal-Mart.
The Netherlands is the next most important investing country, with a stock of C$67.8bn, or 9.9% of the total in 2013, followed by the UK with C$56.7bn, or 8.3% of the 2013 total. Canada's FDI has traditionally been concentrated in the country's old industrial heartland of Ontario and Quebec on the eastern side of the country.
Canada's manufacturing sector is still the primary destination for FDI, with a 30.5% share of total in 2013. But the share of the mining and oil and gas extraction sector, especially in the western provinces of Alberta and British Columbia, has risen from 12.6% a decade ago to 20.3%.
But restrictive government policies also seem to be playing a role. In the OECD's FDI regulatory restrictiveness index for 2013, Canada has one the highest scores for an advanced country. Restrictions on foreign ownership apply in areas such as air transport, telecommunications, financial services, uranium mining and cultural industries.
Most FDI proposals are reportedly approved if they pass the Investment Canada Act’s ‘net benefit’ test, which weighs up the advantages of a project to the country's economy. There have, however, been some high-profile cases where the government blocked proposed investments. In particular, Australia-based BHP Billiton's blockbuster bid of C$38.6bn in 2010 for Potash Corp, the world's largest potash producer, and a C$1.3bn offer in 2008 from Alliant Techsystems, a US company, for the space division of MacDonald, Dettwiler and Associates. Market reports suggest that international investors may now feel deterred by a sense of unpredictability.
Yet, according to Wendy Dobson of the University of Toronto, “Canada is a country in need of international capital to fully realise its comparative advantage based on abundant natural resources.” Ironically, Canada has been a net capital exporter since the mid-1990s, with a net FDI asset position of C$93bn in 2013.
These official statistics are "ridiculously low", however, according to Gordon Houlden, director of the University of Alberta's China Institute. The institute's China-Canada Investment Tracker details more than 250 acquisitions, equity investments and joint ventures worth C$52bn over the past 20 years, concentrated mainly in energy and mining. One factor reportedly skewing government statistics is that considerable Chinese funds are rerouted through banks in London, Luxembourg and the Cayman Islands.
There have been numerous large deals by Asian SOEs in the Canadian energy industry. For example, China's Sinopec acquired ConocoPhillips’ stake in Syncrude Canada for C$4.65bn in 2010. The Korea National Oil Corp bought Harvest Energy Trust for C$4.1bn in 2009. Malaysia's Petronas acquired Progress Energy Resources Corp for C$5.5bn in 2012. And the China National Offshore Oil Corp (CNOOC) bought Nexen for C$15.1bn in 2012, China's largest ever overseas acquisition.
Thus, in approving the 2012 acquisitions by CNOOC and Petronas, Canadian prime minister Stephen Harper announced that further foreign state control of Canada's oil sands development (such as the Nexen case), "would not be of net benefit to Canada" and that future acquisitions would be approved "only in an exceptional circumstance". He added: "Outside the oil sands, our government will strengthen scrutiny under the act of proposals by foreign SOEs to acquire Canadian businesses."
The government's policy decision and its apparent lack of clarity continue to generate public debate. “Raising investment barriers is a blunt and flawed solution,” says Ms Dobson. “Rather than block Chinese capital, Canadian regulators should monitor the behaviour of all firms. Closing off Canadian companies to Chinese bidders can hurt Canada’s economy. If Canadian markets prove hostile, Chinese capital will, of course, find assets elsewhere.”
Indeed, in 2014 “Chinese mergers and acquisitions in Canada collapsed due to both lower interest in extractive assets and greater political scrutiny for investment by SOEs”, according to a report by consultancy Rhodium Group. At the same time, the Foreign Investment Promotion and Protection Agreement between Canada and China was ratified and came into force on October 1, 2014, strengthening the framework for investment between the two countries.
In another point of view, Dany Assaf and Rory McGillis, lawyers with Torys LLP, have argued that the Investment Canada Act has worked well for Canada but state: "If [Canada is] to remain competitive in global capital markets, [the country needs] to more proactively and clearly communicate to foreign investors what is expected of them."
Historically, FDI has always been a part of Canada’s development. UK investors financed railways, canals and other infrastructure. American industrialists built lumber mills, mines and manufacturing factories. Even today, foreign investors control about one-quarter of Canada’s non-financial corporate assets, according to Canadian government estimates.
“Canada is a country that was built on the back of inward FDI,” says Glen Hodgson, senior vice-president and chief economist at think tank the Conference Board of Canada.
The US remains Canada's most important investor, with its C$352.1bn ($277bn) accounting for 51% of the total stock of FDI in 2013, based on Canadian government statistics. "US investors are attracted to Canada's strong economic fundamentals, its proximity to the US market, its highly skilled workforce and abundant resources," says the US Department of State's 2014 investment climate statement.
US companies with large investments in Canada include automakers General Motors, Ford and Chrysler; energy, chemical and mineral companies ExxonMobil, Chevron and ConocoPhillips; financial services firm Citibank; and retailer Wal-Mart.
The Netherlands is the next most important investing country, with a stock of C$67.8bn, or 9.9% of the total in 2013, followed by the UK with C$56.7bn, or 8.3% of the 2013 total. Canada's FDI has traditionally been concentrated in the country's old industrial heartland of Ontario and Quebec on the eastern side of the country.
Canada's manufacturing sector is still the primary destination for FDI, with a 30.5% share of total in 2013. But the share of the mining and oil and gas extraction sector, especially in the western provinces of Alberta and British Columbia, has risen from 12.6% a decade ago to 20.3%.
Competition from China
Despite FDI's historic importance to Canada, the country's share of global stock of inward FDI has dropped from 16% in 1970 to 3% in 2013, based on data from Unctad. This fall is partly attributable to the rise of emerging economies such as China as important destinations for FDI, which has increased the global pool of FDI.But restrictive government policies also seem to be playing a role. In the OECD's FDI regulatory restrictiveness index for 2013, Canada has one the highest scores for an advanced country. Restrictions on foreign ownership apply in areas such as air transport, telecommunications, financial services, uranium mining and cultural industries.
Most FDI proposals are reportedly approved if they pass the Investment Canada Act’s ‘net benefit’ test, which weighs up the advantages of a project to the country's economy. There have, however, been some high-profile cases where the government blocked proposed investments. In particular, Australia-based BHP Billiton's blockbuster bid of C$38.6bn in 2010 for Potash Corp, the world's largest potash producer, and a C$1.3bn offer in 2008 from Alliant Techsystems, a US company, for the space division of MacDonald, Dettwiler and Associates. Market reports suggest that international investors may now feel deterred by a sense of unpredictability.
Yet, according to Wendy Dobson of the University of Toronto, “Canada is a country in need of international capital to fully realise its comparative advantage based on abundant natural resources.” Ironically, Canada has been a net capital exporter since the mid-1990s, with a net FDI asset position of C$93bn in 2013.
Asian interest
A more recent trend has been the rise of Asia as an investor in Canada's natural resources, notably in Alberta and British Columbia. This has been led by state-owned enterprises (SOEs), especially from China and Malaysia. Over the decade to 2013, the Asia-Pacific region's share of Canada's FDI rose from 4.8% in 2003 to 13.1% in 2013, based on Canadian government statistics. The stock of Chinese FDI leapt over the same period from C$216m to C$16.7bn, to stand just behind the C$17.3bn of Japan, which has long been Canada's most important investor from Asia.These official statistics are "ridiculously low", however, according to Gordon Houlden, director of the University of Alberta's China Institute. The institute's China-Canada Investment Tracker details more than 250 acquisitions, equity investments and joint ventures worth C$52bn over the past 20 years, concentrated mainly in energy and mining. One factor reportedly skewing government statistics is that considerable Chinese funds are rerouted through banks in London, Luxembourg and the Cayman Islands.
There have been numerous large deals by Asian SOEs in the Canadian energy industry. For example, China's Sinopec acquired ConocoPhillips’ stake in Syncrude Canada for C$4.65bn in 2010. The Korea National Oil Corp bought Harvest Energy Trust for C$4.1bn in 2009. Malaysia's Petronas acquired Progress Energy Resources Corp for C$5.5bn in 2012. And the China National Offshore Oil Corp (CNOOC) bought Nexen for C$15.1bn in 2012, China's largest ever overseas acquisition.
Foreign state control
The growing interest of SOEs in Canada’s assets has provoked lively public debates on the merits of these investments. As Yuen Pau Woo of the Asia-Pacific Foundation of Canada has highlighted: “Public opinion has clearly been against investment by SOEs in Canada and investment by Chinese SOEs in particular.”Thus, in approving the 2012 acquisitions by CNOOC and Petronas, Canadian prime minister Stephen Harper announced that further foreign state control of Canada's oil sands development (such as the Nexen case), "would not be of net benefit to Canada" and that future acquisitions would be approved "only in an exceptional circumstance". He added: "Outside the oil sands, our government will strengthen scrutiny under the act of proposals by foreign SOEs to acquire Canadian businesses."
The government's policy decision and its apparent lack of clarity continue to generate public debate. “Raising investment barriers is a blunt and flawed solution,” says Ms Dobson. “Rather than block Chinese capital, Canadian regulators should monitor the behaviour of all firms. Closing off Canadian companies to Chinese bidders can hurt Canada’s economy. If Canadian markets prove hostile, Chinese capital will, of course, find assets elsewhere.”
Indeed, in 2014 “Chinese mergers and acquisitions in Canada collapsed due to both lower interest in extractive assets and greater political scrutiny for investment by SOEs”, according to a report by consultancy Rhodium Group. At the same time, the Foreign Investment Promotion and Protection Agreement between Canada and China was ratified and came into force on October 1, 2014, strengthening the framework for investment between the two countries.
In another point of view, Dany Assaf and Rory McGillis, lawyers with Torys LLP, have argued that the Investment Canada Act has worked well for Canada but state: "If [Canada is] to remain competitive in global capital markets, [the country needs] to more proactively and clearly communicate to foreign investors what is expected of them."