A Rule of Reason for Inward FDI: Integrating Canadian Foreign Investment Review and Competition Policy
Authors: Bishop Grant 
Published: January 2025

The Investment Canada Act (ICA) needs an overhaul. This reform must include a paradigm shift in thinking to a much less restrictive view about the benefits of foreign direct investment in Canada. Currently, the ICA operates under the presumption that foreign firms behave detrimentally to the Canadian economy: foreign acquirers are required to show “net benefit” to Canada and may need to make onerous commitments for maintaining output or employment. This attitude, a holdover from the ICA’s predecessor, the Foreign Investment Review Agency, has created an atmosphere which fosters protectionism and relies on economically incoherent factors to assess the merit of proposed transactions. It is time to shed that archaic attitude and adopt a more reasoned perspective. Rather than requiring each proposed transaction to provide proof for the specific benefit to Canada, the ICA should assume that foreign acquisitions benefit Canada unless there is proof to the contrary. A more welcoming, balanced and rational perspective would be that foreign acquisitions actually improve the productivity of Canadian companies and contribute to the wellbeing of Canada’s economy. The ICA is flawed in other ways, too. Some reviews of proposed transactions have become unnecessarily fraught with politics. Think of the recent politically enmeshed fretting over the bid that the state-owned Chinese Offshore National Company made for Nexen Energy, or Malaysia’s state-owned Petronas’ bid for Progress Energy Resources Corp. Indeed, there has been a very real fear of traditionally Canadian-owned institutions losing their Canadian essence to foreign ownership. Then, too, there is the federal government’s built-in ability to impose onerous conditions, or undertakings, on foreign acquirers. All this is clearly a deterrent to potentially beneficial foreign investment in Canada. Canada needs a new regime without nationalism, protectionism and politics. Ideally, this new regime would require decisions based on economically-grounded criteria, with the onus placed on the federal government to prove that a given transaction would be detrimental to the domestic economy. This would shift the government’s role from its current one, in which the minister of innovation, science and economic development approves a proposal deemed to be beneficial to Canada, and has broad powers to withhold federal approval. This leaves the rejected foreign acquirer with no impartial avenue of appeal, such as a specialized tribunal. The reforms to the ICA should also include establishing a specialized tribunal where foreign acquirers can challenge negative decisions, just as the Competition Act provides a means for challenging antitrust aspects of mergers and acquisitions more broadly. There is extensive empirical evidence demonstrating that foreign investment is beneficial to Canada because it results in improvements in productivity and competitiveness. As well, foreign-controlled firms in Canada pay higher wages, make large investments in R&D, innovation and skilled labour, experience fewer layoffs during economic downturns, and impart their technologies to domestic firms, among other benefits. Indeed, from 1980 to 1999, 2/3 of Canada’s manufacturing sector labour productivity growth came from foreign-controlled companies, even though they comprised only 40 per cent of that sector’s employment. Not only could the Competition Act with its tribunal model serve as a framework for these much-needed reforms to the ICA, but, as well, reform of the ICA should similarly entrench the promotion of competition, economic efficiency and domestic welfare as its core objectives. That translates to not treating foreign investment as an end in itself, but as a means to promote economic efficiency through competition in both markets for products and corporate control.