The Canadian Council of Chief Executives recently published a paper endorsing a new national security test for proposed foreign takeovers of Canadian companies entitled “Chinese Foreign Direct Investment in Canada: Threat or Opportunity”.
According to the author, Dr. Moran, a professor of international business and finance at Georgetown University, the majority of proposed foreign acquisitions “pose no plausible threat whatsoever” to national security.
From the CCCE:
“In today’s report, Dr. Moran considers two issues of central interest to Canada as Chinese foreign direct investment (FDI) grows to be a major force in the global economy: how does Chinese FDI affect the structure of natural resource industries around the world?; and when does the foreign acquisition of an existing firm constitute a national security threat to that firm’s home country?
On the first question, Dr. Moran rejects the suggestion that Chinese investments in the natural resource sector have the effect of “locking up” the world’s resource base. On the contrary, a review of several dozen recent Chinese acquisitions and procurement arrangements shows that most of them actually help to expand and diversify resource production and increase competition within the affected industry.
As to whether a given foreign takeover poses a risk to national security, Dr. Moran recommends the adoption of a new threat-assessment framework based on three distinct categories of undesirable foreign acquisitions: takeovers that would render the home country dependent on a foreign-controlled supplier that might deny or place limits on the provision of goods or services crucial to the functioning of the home economy; takeovers that would allow the transfer into foreign hands of technology or expertise that might be deployed in a manner harmful to the home country’s interests; takeovers that would give the new owner’s government, or some other hostile force, a platform for espionage, surveillance or sabotage, through the provision of goods or services crucial to the functioning of the home economy.
Acquisitions that fall into any of those three categories can legitimately be rejected on national security grounds, Dr. Moran says. However, that accounts for only a small percentage of proposed foreign takeovers. The rest, he says, may or may not deserve to be blocked on other grounds, but cannot fairly be considered threats to national security.
The adoption of this three-part threat assessment framework by Canada – and other countries – would “help to dampen politicization of individual cases, enabling swift and confident approval of those acquisitions from which genuine national security threats are absent,” Dr. Moran says. The entire international economic system would benefit, he argues, if OECD countries – and non-OECD countries such as China and India – were to accept this common threat assessment methodology.”
In March, 2009, amendments to the Canadian Investment Canada Act (“ICA”) introduced a new national security review mechanism, under which the Minister and Federal Cabinet have the power to review proposed or completed investments that may be “injurious to national security” in Canada. This relatively new national security review regime, which is distinct and administered separately from the general “net benefit” to Canada foreign investment test under the ICA, arose as a result of recommendations made by the Competition Policy Review Panel in its report entitled Compete to Win (which preceded significant amendments to Canada’s competition and foreign investment laws in 2009 and 2010).
Under Canada’s new national security review regime, the Federal Government may conduct a national security review of an investment regardless of whether it triggers the general thresholds for a review under the ICA or whether control of a Canadian business is acquired.
Moreover, the term “national security” has currently been intentionally been left undefined, which gives the Minister and federal Cabinet wide scope to determine which investments to review from a national security perspective (and the grounds on which to approve, block or impose conditions on investments).
For the CCCE’s news release and link to the paper see:
Canadian Council of Chief Executives
For more information about Canada’s foreign investment review regime and national security reviews see:
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