Foreign Direct Investment in Canada: A Complicated Opportunity


by Kyle Muir

The Government of Canada’s recent decision to block the purchase of Aecon Group Inc. by Chinese state owned enterprise (SOE) CCCC International Holdings Ltd. for $1.5 billion in the interest of ‘national security’ is the just latest example of the country’s habit of placing politics ahead of economic prosperity when faced with controversial foreign direct investment (FDI) opportunities. Other than causing confusion in both the policy and diplomatic communities, the move highlights Canada’s pressing need to review the Investment Canada Act (ICA), the piece of legislation mandating state oversight of large FDI proposals. More specifically, the vague language of the ‘net benefit’ test, on which the Aecon decision was based, must be examined closely in relation to the domestic, international, and economic dimensions of its invocation.

In macroeconomics, FDI is a net transfer of funds from a different country to acquire a share of physical capital, and is an important instrument when determining something called multiple factor productivity (MFP). A measure of a country’s broad technological progress, MFP is significant because in chorus with legal institutions and facilitation of ‘radical’ entrepreneurship, FDI contributes to its – and the economy’s – long term growth in developed nations by increasing exposure to foreign competitive practices and innovation. In the Canadian context, this frequently takes the form, as a consequence of relatively frail domestic resources, of FDI being able to improve access to international capital markets, raising capital density and labour productivity in specific industries. However, as was the case in 2010, careful analysis of the Aecon situation reveals the ICA’s insufficiency in encouraging the federal government to prioritize economic benefit when addressing publicized FDI.

FDI involving Chinese state owned enterprises (SOEs) have long been a source of political concern, with 48% of Canadians in 2015 claiming to be ‘skeptical’ or otherwise opposed to Chinese investment in the economy. Distrust of these SOEs, fuelled by a widespread fear that they are beholden to geopolitical interests of the Chinese government, first flared up in reaction to the 2011 acquisition of Nexen by CNOOC, another Chinese SOE. However, analysis of Chinese investment patterns, especially when read in the context of the ICA’s application to the Aecon deal, reveals that fears of national security and sovereignty loss miss the mark and may actually be constraining Canada’s economic potential instead of affirming its security. While late Albertan Premier Jim Prentice’s insistence that the Asian markets’ emerging appetites represent an opportunity for Canada’s trading network to diversify away from American hegemony still ring true today, there also exists ample evidence of shifting SOE structures themselves, to be more profit-seeking and less dependent on state direction. Finally, mandatory review for direct acquisitions worth more than $5 million for non-WTO investors and a much lower review threshold ($398 million) for SOE investments as opposed to those from trading partners ($1.5 billion) are pursuant to ICA protocol, indicating that we already differentiate in a politically neutral way between the two firm types as FDI sources.

Before delving into the ICA’s possible future, it is important to consider the present climate of global protectionism in international trade philosophy and practice. Despite establishing the ‘Invest in Canada’ organization in March to attract inward FDI, fears of retaliation by the Trump administration, which has not only already blocked two Asian-sourced FDI proposals, but also – ironically – applied tariffs to Canadian steel imports on national security grounds, the federal cabinet has been compelled to tread softly around high-profile FDI opportunities.

The fundamental FDI policy question, therefore, becomes litigious in nature: how can the ICA review process be reformed in such a way as to most objectively and least ambiguously clarify whether or not a prospective FDI delivers a ‘net benefit’ to Canada? The current approach to assessing FDI asks specific and relevant questions, such as the magnitude of economic stimulus to Canada, or the impact on the Canadian labour market, and is more rigorous than equivalent processes in other industrialized economies. Meanwhile, loosely defined ‘national security’ approvals required uniquely for SOE-related investments could explain Canada’s abnormally high score on the OECD’s regulatory restrictiveness index, 2.5 times higher than the average.

What, therefore, are the facts regarding the Aecon deal itself? In a nearly identical 2015 move, Australian construction firm John Holland was successfully purchased by CCCC Holdings Ltd., the same SOE whose Aecon proposal was blocked, and has since enjoyed a profitability increase fuelled by $23 billion worth of infrastructure contracts and – presumably – exposure to Chinese business practices. Fundamentally, then, an objective and transparent ‘net benefit’ or national security test, the deciding factor in the Aecon deal’s demise, must be adopted or at least considered by the federal government. In the interest of optimizing the outcome of a deal such as Aecon’s, economically and politically, the ICA must neither be scrapped entirely nor Chinese SOEs given a carte blanche to buy up as many firms with access to strategic resources or sensitive information as they please. Either requiring the public disclosure of more financial information about an SOE investor, or more clearly defining Innovation, Science, and Economic Development Canada’s criteria for passing a ‘national security’ test in the first place, would enable the ICA to more fully inform the Canadian public, close trading partners, and its own intelligence agencies about the potentially positive impact of Chinese FDI. Considering the current state of Canada-US relations, our country’s future may depend on it.

Kyle Muir is a Master of Public Policy student at the University of Toronto, and holds a bachelor’s degree in English Literature and Economics from McGill. He has a particular interest in the correlation between domestic politics and international trade.