Simplifying the Rule Book: A Proposal to Reform and Clarify Canada's Policy on Inward Foreign Direct Investment

Abstract

Canada’s foreign direct investment (FDI) review regime, already criticized for its vague “net benefit” test for large proposed takeovers, has become potentially even more confusing to would-be investors in recent years. This Commentary proposes reforms to make the application of Canadian FDI rules more transparent, and give Canada a far better reputation as a place to invest. The author advocates an end to foreign investment economic review, leaving security to a separate committee, and closing some sectors completely or partially to foreign investment, as is now the case, but with these restrictions subject to periodic, mandatory reviews. Under the author’s proposal, Industry Canada would cease reviewing inward FDI for compliance with a “net benefit” test and would be only one participant in a committee reviewing FDI proposals for national security concerns. It would take central responsibility for monitoring federal sectoral ownership policies and would regularly review the effect of such policies, including an assessment of the ongoing need to keep in place foreign ownership limits on a sector, or to remove such limits. Clearly, there needs to be continuing analysis of sectoral limits as technology and government policies change over time. The rationale behind such an approach rests on the rejection of the widespread idea that securing controlling ownership of a Canadian-owned firm allows a foreign investor, whether or not an SOE, to operate at will in Canada. Nothing could be further from the truth. Regarding natural resource exploration and development alone, there are myriad laws and regulations for licences and other permissions on exploration, environmental review, sourcing of supplies and other inputs, as well as many other activities requiring approvals from various levels of government. Where improvements in such laws, regulations and policies are needed, they should be instituted and apply to both domestic and foreign firms with regard to their Canadian operations. It makes no sense to have rules that impose conditions on inward FDI but not on existing local firms.

Keywords: Trade and International Policy

JEL Classification: F21, F52