Foreign investment in Canada: opportunity + danger

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This piece is one of a series of high-profile Canadians commenting on the Canadian Chamber of Commerce's Top 10 reasons Canadian competitiveness is dropping.

David Emerson has seen foreign investment from all sides. He held top jobs at Canfor Corp., Canadian Western Bank and the British Columbia Trade Development Corp. During four years as a Member of Parliament for Vancouver Kingsway for both the Liberals and the Conservatives, he held the International Trade portfolio, among others, where he helped pound out a deal on softwood lumber. Mr. Emerson is now a partner with Vancouver-based private equity firm CAI. He spoke to us about the challenges of attracting more foreign investment to Canada.

Why is attracting foreign investment to Canada so important?

Trade and competitiveness are about being a major player in global networks, so if you're going to be part of those networks, you really do need to have a multi-country investment footprint. And if you look at where the growth is occurring, a lot of it has been in developing market economies. We've got to invest there, but we can't invest unless we're prepared to have some reciprocation and investment here. And that comes with all kinds of complications, because the very economies where the growth is occurring are economies that, in many cases, are what you'd call state capitalist economies, like China, with tremendous amounts of state ownership and intervention. Just as an aside, when I did a review of the space and aerospace sectors last year, one of the issues I was struck by was the performance of foreign-owned companies operating in Canada. I've got to tell you that their performance in terms of research and development and the strengthening of the Canadian competitive position was really quite breathtaking. It's important to recognize that foreign investment is not necessarily a hollowing out of the Canadian economy. Yes, there are issues around head offices and the corporate nervous system, but there is also a very positive upside.

What makes us a desirable place for foreign investors?

We're a very stable economy. We've had a strong economic performance in the last five or 10 years. Natural resources are obviously a critical attraction, because developing economies need the commodities that Canada has in abundance to continue their climb up the developmental curve. We are benefiting quite substantially from that, and that creates huge opportunities for countries to invest here. But it has implications for other sectors, if we don't manage it properly.

And what are those implications?

Well, there's been this great debate about Dutch disease in Canada, which has in some ways been wrong-headed. It has implied that natural resource exports and major investments in natural resources and their effect on the exchange rate is hurting the competitiveness of non-resource sectors in the economy. But I think the issue is much bigger than that. Yes, there is an exchange-rate impact. But if you don't manage your natural resources properly, you get into labour-market bottlenecks that create labour-cost inflation. You get cost inflation on construction materials, which drives up the cost of capital generally. So you get a whole constellation of impacts that affect the non-natural resources economy. And I think governments in Canada have not been particularly astute in the way we manage natural resource revenues.

In what way?

One of the issues I've written about recently is our tendency to take our natural resource revenue – which is really a long-term asset belonging to future generations of Canadians, as well as ourselves – and monetize it. We've been using that money to fund the operating expenses of government. And that creates some really serious problems, because it starts to build in fiscal instability, since those revenues are cyclically unstable and subject to the ups and downs of global commodities. And it creates a situation in which you're selling assets to basically pay for groceries.

What should we be doing with that money?

We should be setting it aside into what you can broadly call sovereign wealth funds, which we can then use to invest in long-term infrastructure to help broaden and stabilize the Canadian economy. We can support investments in research and development, we can invest in financial securities to provide a long-term income stream that will benefit future generations and take down the general expense of government. But to just take the asset, monetize it and throw it into the operating accounts of the government is not the way to go.

What impact does foreign investment have on that scenario, when we're giving up a large portion of the revenues from our natural resources?

It's not foreign investment, so much as our own uncontrolled and unrestrained development of our resources that is the problem. From a national interest point of view, you have to make sure you have the regulatory framework in place so that foreign investment is followed by corporate behaviour that is consistent with Canadian laws and fundamental objectives. And I think we've struggled with that in the past.

There's been confusion about takeovers in Canada, with talk of net benefits and strategic assets – you can take over Nexen, but you can't take over MacDonald Dettwiler or Potash. Why the lack of clarity?

It's a very messy area. Canadian taxpayers have made significant contributions to the development of certain technologies and companies, so there's an automatic obligation to protect the interests of taxpayers. Another complicating factor is national security. We live in a world where the geopolitics of security have become much messier. There are a lot of things we can do with sensitive technologies with the United States, for example, that we cannot do with certain other countries. For instance, many of the aerospace technologies are dual-use – they can be used for peaceful purposes, and they can be used for military purposes. So who can come in and invest in those kinds of technologies and what is going to be done with them is another complicating factor. And to write it all in to regulation is almost guaranteed to leave room for difficult situations to arise.

So, really, it can only be on a case-by-case basis?

Generally speaking, I think that's true, because there are threshold effects in natural resources. There are security issues that are mind-bendingly complicated and multidimensional. And so to try to apply one-size-fits-all to that kind of world would be, I think, stupid.

Are there countries that are taking a different approach to foreign investment that should be a model for us?

I think that in most countries, there's a pretty significant zone of discretion reserved for the government, and I think some of the issues we've talked about – in terms of security and control over natural resources and so on – are equally prominent in most resource-rich countries.

So what should we be doing to encourage more foreign investment?

I think we need to pay an awful lot of attention to some of the regional trade frameworks that are emerging, like the Canada-EU potential trade agreement. That should have a significant investment dimension. We should be exploring bilateral relationships to try to establish a rules framework for investments with countries like China. The old world of the WTO and the multilateral framework that we've relied on in the past has really ground to a halt, so we've got to look for other kinds of frameworks to dig deeper into some of the issues around foreign investment. And the rules you might want to apply to China or India, compared with the United States or Japan, are probably very different. We want symmetry with, say, China on mining and energy, but it's a difficult issue, because Canada is not truly open in a number of areas – we have restrictions on foreign ownership, whether it's airlines or telecoms or cultural industries. So I think it's really important that we recognize how messy it is and we need to try to gradually create a rules framework that enables us to have more open investment rules.

And what about public comfort levels with some of these deals?

The most important thing is to be clear about what Canadian law and Canadian regulations and the Canadian approach is to foreign investment and the development of the Canadian economy. I think the public doesn't really understand, for example, that when a foreign company buys a Canadian natural resources company, they're not buying the resources, they're buying the right to extract the resources. We need to be better at communicating to Canadians the hard, positive reality of what our laws are designed to do and that no foreign investment is going to be made that goes beyond Canadian laws and frameworks.

There's a lot of confusion out there.

There's just a huge amount of confusion. It's so easy, in this world of instant social media, to cast something in symbolic terms, but not factual terms. It is messy to create a compelling narrative to these kinds of issues And that's part of the adjustment governments are going through in terms of figuring out how to be more effective in the global economy. I don't think, frankly, that the role of government is going to get smaller. I think it's going to get more strategic and more significant as they struggle to figure out how to transform and reinvent how they do business.

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This interview has been edited and condensed.