Not all foreign takeovers are good for Canada
Reforms to the Investment Canada Act will sacrifice Canadian jobs and profits
By Gus Van Harten Professor, Osgoode Hall Law School
TORONTO - The Harper government is going soft, or should I say softer, on foreign takeovers of Canadian companies. In its latest reforms to the Investment Canada Act, the government will give up powers to safeguard the Canadian economy when foreign firms buy their Canadian competitors.
After the damage done by takeovers by Caterpillar, U.S. Steel, Vale, AbitibiBowater, and other foreign companies, one might think the government would strengthen our investment laws. Instead, it is diluting them by raising the threshold for federal reviews of foreign takeovers from $330 million to $1 billion. Thus, if a foreign company buys a Canadian competitor worth less than $1 billion, the government will relinquish its role in reviewing the deal. Worse, the change will be difficult to reverse because of restrictive rules in NAFTA and other trade agreements.
The change has little to do with encouraging foreign investment that contributes to the Canadian economy. The review process does not even apply to “greenfield” investment; that is, to foreign investment that does not involve the takeover of a Canadian company. Foreign firms wishing to set up a new business in Canada have long been free to do so.
Instead, the review process under the Act allows the government to limit possible harm caused by foreign takeovers. It has been used pragmatically to require foreign buyers to maintain production, employment, headquarters, and research and development in Canada. In its entire history, the Act has been used only twice to block a takeover. The reviews are beneficial because they deter foreign companies from looting Canadian assets. They send a signal to the market that, if a Canadian firm is for sale, foreign buyers should commit to maintaining Canadian jobs and profits for a reasonable period.
By diluting the rules, the government opens the door to the wrong kind of foreign investment: that which buys Canadian businesses to raid assets and technology and to shutter competition. It creates an environment where more and more rapacious Caterpillars can eliminate Canadian production and devastate communities. Presumably the government will then throw up its hands - as it did in the Caterpillar case - and say it has no role to play.
This reflects a pattern with the current government. Largely on its watch, numerous Canadian companies have been given over to foreign ownership. American, Chinese, Brazilian; capitalist or Communist; it seems no foreign offer to acquire a Canadian asset will be refused.
We are a resource economy, but if we do not add value to our exports we are in deep trouble. Unfortunately, the Conservatives seem intent on taking Canada out of the value-added business by shipping or piping away our raw resources for processing in other countries, while neglecting the manufacturing sector. In the long run, this is a major mistake.
To support a value-added economy, the government has to play a role alongside markets. It should encourage markets to ensure tough competition but also support Canadian ownership. The aim is to have Canadian firms at the edge of the technological frontier so they can command super-profits for their products, at home and abroad. Obviously this goal is imperilled by a hands-off approach to foreign takeovers.
The government defends its hands-off approach by invoking free markets. In truth, there is no free market. There is only a messy world in which markets interact with the policies of governments. If our government chooses to sit on its hands, others will thank us and then fleece us. The real effect of the government’s policy is to favour foreign companies - and the bankers, lawyers, and accountants who service them - that want to buy Canadian assets and then run (or raid) them according to their own priorities.
From the U.S. to Brazil to Europe to China, other governments combine markets with conscious support for national firms. They take steps to block foreign raiding of their corporate assets and strategic resources. Canada supports the emergence of Canadian companies through its health, education, and research policies, for example. Yet when our companies prove themselves competitive, the government serves them up for foreign buyers.
This is a bit like the general who orders soldiers to fight with batons because he thinks guns are dishonourable. Frankly, the Harper government appears willing to sacrifice a value-added economy in order to appease foreign interests, especially in the resource sector.
In the colonial era, those who profited from selling out their people to foreign interests were called compradors. Perhaps we should start using that word again.
Gus Van Harten is a professor at Osgoode Hall Law School where he teaches investment law and policy. He has a PhD in international investment law from the London School of Economics.