MLI author shows how to reconcile openness to investment and protecting the national interest


February 13, 2012, Ottawa, ON - Canada's well-educated workforce, stable economic environment, competitive business tax regime, access to natural resources and formal openness to business investment make us an attractive destination for foreign investment in our economy. Foreign Direct Investment (FDI) provides a range of benefits to Canadians, including filling domestic investment gaps, financing increased production, increasing and enhancing employment opportunities, and facilitating technology transfers. Unfortunately, numerous recent incidents with respect to potential foreign investment in natural resources (Potash Corp.), telecoms (Wind Mobile) and high tech (Research in Motion) are creating major confusion and uncertainty in the minds of foreign investors and thereby jeopardizing Canada's status as a welcoming destination for FDI. Canadians will pay a high price in lost economic opportunity if governments' policy ambiguity is not clarified at the earliest opportunity.

In the latest instalment of the Macdonald-Laurier Institute's Straight Talk series, MLI Senior Fellow Laura Dawson explores Canada's historical and current experience with foreign direct investment and offers a number of recommendations to promote Canadian interests without stifling investment.

Dawson says, "Canada is currently losing its position as a beacon for FDI. For example, between 1995 and 2004, FDI was equal to about 15 percent of domestic business investment, but that has now fallen to about seven percent. Key to our long-term success is a predictable, stable environment for investment and business development that starts with neutral depoliticized foreign investment approval process."

She uses recent high profile cases to illustrate the problems in Canada regarding FDI, including flip-flops on whether to allow Wind Mobile to participate in a national wireless spectrum auction and government intervention in the case of Potash Corp. Both of these cases raise questions about Canada's commitment to foreign investment and the stability and predictability of Canadian laws.

Moreover, Dawson adds, there is growing concern that the Canadian government's openness to FDI may soon be tested by proposals for foreign acquisition of companies with Canadian intellectual property. The most visible example of this may well be future investments in Research in Motion. The Canadian government must provide a consistent, clear set of policies if we are to repair and renew our position as a leading destination for foreign investment.

In order to provide greater clarity to Canadians and greater certainty to international investors, Dawson proposes that the federal government should heed recommendations from its own 2008 Compete to Win report. These recommendations include reversing the onus of the federal net-benefits test, increasing the review threshold to $1 billion to provide greater transparency when reviewing investment in the cultural industries, and greater liberalization of controlled sectors such as financial services, telecommunications, air transport, and mining.

Dawson concludes, "The greatest deterrent to investment is uncertainty, especially when rules are not clearly spelled out or when politics leads the government to backpedal on a decision. Generally speaking, with a strong rule of law, a functioning court system, fair taxation, moderate red tape and good infrastructure, Canada is able to attract high quality foreign investors who will stick around and generate 'net benefits' to the long-run health of the economy. Arbitrary and inconsistent responses to proposed FDI, however, create just the kind of uncertainty that will undermine Canada's reputation as a safe home for foreign investment, while providing little or no benefit to Canadians."

Click here to read the latest Straight Talk with Laura Dawson on FDI.

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