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Posted June 26, 2012

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Guest Columnist

Foreign buyer for RIM could create net benefit for Canada

How does Canada restrict investments not in Canada’s interest while avoiding the message that it is unfriendly to investment?
By Laura Dawson, Senior Fellow, Macdonald-Laurier Institute

OTTAWA - Research in Motion (RIM) is known around the world for its BlackBerry mobile phones. However, amid mounting troubles, RIM is forced to look at new business models, including putting itself up for sale.

If this happens the company could be targeted by foreign investors, and the Canadian government would face tough choices regarding the net benefits to Canada and implications for national security.

While the sale of Canada’s flagship intellectual property company to a foreign entity might do symbolic damage to the country’s image, Canada’s national pride would certainly survive the end of RIM, while our economy could benefit.

RIM’s share of the international smartphone market has dropped precipitously, from 14 per cent to 8.8 per cent in 2011 alone, prompting talk of a potential takeover. International companies such as Microsoft, Nokia, Amazon, Samsung and Icahn have been touted as potential suitors, but few have expressed interest in acquiring the whole company.

It is likely that the company would be broken up and its intellectual property assets - worth an estimated $4 to $5 billion -would be auctioned off. While this will set off the usual howls for Ottawa to try to protect an iconic Canadian firm, sometimes nationalism comes at a cost.

When comparing RIM’s potential sale to the breakup of Nortel, another high-tech giant, remember that RIM’s former co-CEO Jim Balsillie argued that Nortel ought to remain in the hands of Canadians. However, in the end RIM was able to acquire Nortel assets only by joining a consortium that included U.S.-bidders Apple and Microsoft. Not every Canadian asset is a national treasure that must be guarded from foreign hands. When an asset has lost its lustre, sometimes it makes sense to take the best deal available.

The Nortel case contrasts with Saskatchewan’s Potash Corp, where the federal government intervened to block a hostile takeover by BHP Billiton because the proposal failed to meet the test of a net benefit to Canada, because the purchase would have led to the demise of Canpotex, Canada’s enormously powerful potash export cartel, and cost Saskatchewan an estimated loss of $3 to $6 billion in provincial tax revenue. The lesson is that in those cases where we have an asset in high demand, it makes sense to hold out for the best deal possible.

The challenge for policy-makers is how to restrict investments that are not in Canada’s interest while avoiding sending the message that Canada is unfriendly to investment. When considering a proposed sale, the federal government considers the net benefits offered by the acquisition, including the extent of Canadian content, significance of Canadian participation, effects on economic capacity, compatibility with industrial, economic and culture policies, and effects on domestic competition.

For most types of foreign purchases, the current provisions for foreign investment screening established in the 1985 Investment Canada Act adequately balance public policy and economic interests while keeping restrictions on private commercial decisions to a minimum. While Canada is unique in the industrialized world in screening all foreign takeovers, the rate of rejection has fallen from nearly 15 per cent in the days of the Foreign Investment Review Act to just two out of the last 1,600 proposals, even if the two were high profile. This is not exactly putting a wall around Canada’s borders.

There are several myths around foreign direct investment that befog the debate. There is no evidence that foreign investment ‘hollows out’ corporate Canada. This perception is based more on populist rhetoric than evidence. On the contrary, the statistical record clearly shows that foreign-owned firms bring substantial benefits to Canada: they pay better wages, they have higher productivity, invest more in research and development, and have created head office jobs at a faster rate than Canadian companies. And there is no evidence that Canadian companies put our national welfare above their bottom line.

Canadians should realize that they have a great deal at stake if undue restrictions become the norm in the international governance of investment flows. The image of Canadian firms being plundered by foreign investors has long been outdated; for every company foreigners buy in Canada, we’re snapping up a bank or a resource company outside Canada. At the end of 2011, Canadians had $684.6 billion of direct investment abroad, more than the $607.5 billion foreigners invested in Canada. Investing abroad by our firms brings direct benefits to the Canadian economy: the Canadian-owned companies that most closely perform like foreign-owned companies in terms of productivity and innovation were the ones with the greatest orientation to global markets.

Overall, Canada’s rules for governing foreign investment are adequate to balance public policy concerns regarding national security and foreign ownership in sensitive sectors with economic growth and competitiveness. However, our decisions on foreign investment in Canada must be based on a confident assessment of Canada’s interests, not fear of foreigners.

Laura Dawson is a senior fellow of the Macdonald-Laurier Institute (www.macdonaldlaurier.ca) and the author of the recently released Potash and BlackBerries: Should Canada Treat All Foreign Direct Investment the Same?



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