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Better Foreign Investment Rules Needed for Canada


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Dec. 1, 2011  - Ottawa should transform the Investment Canada Act to create a broader, more transparent foreign investment review regime to encourage investment inflows while protecting Canadian national interests, according to a new report from the C.D. Howe Institute.  In "Reforming the Investment Canada Act: Walk More Softly, Carry a Bigger Stick," authors Philippe Bergevin and Daniel Schwanen say that Canada should scrap the "net benefit test" that now restricts inbound foreign investment. The authors argue that such an overhaul could help reverse Canada's declining share of global foreign direct investment, and bring Canada in line with its more open peers.

“Canada needs a regime that casts the net wider in protecting Canada’s national interests, but is less obtrusive to any single investment,” according to Daniel Schwanen, Associate Vice President, International and Trade Policy at the C.D. Howe Institute. “The current lack of transparent criteria risks setting dangerous precedents for investment into Canada and Canadian investments abroad.”

Canada benefits from foreign investment, say the authors, but the Investment Canada Act creates unnecessary barriers to it.  Currently, before approving any foreign investment above a specific dollar threshold, Canada imposes a test of its “net benefit to Canada,” including its potential effect on Canadian employment, exports, and productivity. The test requires a prospective foreign investor to share confidential plans with the federal government and to demonstrate how these plans would be of net benefit to Canada. As a condition of approval, investors also may be obligated to make legally binding promises, or undertakings, concerning the net benefit of the investment over a period of a few years.

The current test is subjective and unpredictable, the authors argue, and does not necessarily cover many situations where Canada’s interests might be involved beyond the narrow calculation of a net benefit. Furthermore, the test is a throwback to an outdated industrial policy that was detrimental to the economy’s long-run growth.

The authors recommend scrapping the current test and replacing it with a national interest test.  This would require the federal government, if denying a proposal, to show that the proposed foreign investment was contrary to Canadian interests. The new test would address concerns over national security or state-owned investors, and could replace existing sectoral investment restrictions. When a proposed investment does not affect governments' abilities to apply Canadian laws or pursue legitimate policy goals, the national interest test would lower obstacles to that investment.

Reform would increase Canada’s attractiveness to foreign investors, and improve the nation's future economic performance.

Click here for the full report.

For more information contact:

Philippe Bergevin, Senior Policy Analyst;

Daniel Schwanen, Associate Vice President, International and Trade Policy;

C.D. Howe Institute, 416-865-1904; email: cdhowe@cdhowe.org

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