Did Canada’s New Rules Scare Away Investors?
“Foreign takeover limits are scaring away investors!” Headlines like this one flooded in after a speech given by Mr. Jim Prentice, the CIBC vice chair and former federal Industry Minister, in early October. In that speech, Mr. Prentice particularly singled out the government’s decision to limit investment by state-owned enterprises in the oil sands following its approval of the CNOOC-Nexen deal. He also stated that while he supports the policy, it has already caused negative blowback. (refer to The Canada Press, posted October 1, 2013).
According to John Ivison at the National Post (Oct 1, 2003), Mr. Prentice offered the following 3-point proof for his alarm:
1. Foreign Direct Investment (FDI) in the oil patch has declined 92 per cent this year to $2 billion from $27 billion last year
2. Merger and acquisition activity (M&A) has dropped to $8 billion from $66 billion last year, and
3. The disparity is not solely due to 2012 being a bumper year because of the $17 billion Nexen deal – CIBC figures suggest (M&A) activity has averaged around $50 billion a year over the last decade.
These seemingly solid numbers quoted by Mr. Prentice led to my investigation of their sources. What I found is the following:
1. According to The Beijing Axis (http://www.thebeijingaxis.com), which cites China’s outward FDI numbers published by the Chinese Ministry of Commerce, in the first half of 2013, “China’s OFDI amounted to USD $45.6 billion, with the largest deals in the resources sector, including CNOOC’s acquisition of Canadian company Nexen, China’s largest (overseas) acquisition to date.
2. According to the Chinese Ministry of Commerce (mofcom.gov.cn), for the first nine months of 2013, China’s monthly outward FDI fluctuated from $4.1 billion (January) to $14.2 billion (February) and averaged $6.8 billion; and its accumulated OFDI for these nine months is $61.2 billion, of which the Nexen deal accounted for about 25 per cent
3. According to Statistics Canada (Cansim database: Tables 3760004 and 3760121), the total net FDI inflow to Canada for the first half of 2013 ($31 billion) grew by almost 50 per cent compared to both the first ($22 billion) and the second half ($21 billion) of 2012, and was higher than the average ($21.9 billion) of its counterparts (i.e., the half-year count of total net FDI inflow) over the past decade (2003-2012).
4. Mergers and acquisitions associated with FDI indeed dropped to $7 billion (not $8 billion) for the first half of 2013 from $23 billion (not $66 billion) for the whole of 2012. But the average annual value of such M&A for the period of 2007-2012, the longest period available for such data from Statistics Canada, was only $28 billion (not $50 billion); and this is a highly skewed average number since the value of such activities peaked at $87 billion in 2007 and dropped to $7.5 billion in 2010.
5. FDI associated with the energy and mining industry for the first half of 2013 was $6.5 billion compared to $6.9 billion for the whole of 2012, and exceeded the half-year average of $6.2 billion for the period of 2007-2012.
Canada’s new rules have not scared away investors from China
Obviously, the two sets of data do not match: the argument presented by Mr. Prentice is not supported by the data I gathered above, which, in many ways, show an encouraging long-term trend. Technical gaps, such as whether to count the CNOOC-Nexen deal for 2012 or 2013 and whether to focus on pre- or post-deal data, are partly to blame; and the relevance of the message – such as whether to look only at the oil patch or across industries for FDI, and whether to count general M&A or only FDI-related M&A – may also help explain the difference. It is because of such statistical subtleness, policy debate should not be kidnapped by any rushed citation of a narrow range of data.
It is also worth noting that in a 2013 ranking of China’s 67 OFDI destinations by The Economist Intelligence Unit, based on its survey of 110 Chinese firms, Canada is No. 6 (with a score of 43.2), following the United States (54.9), Singapore (48.9), Hong Kong (45.9), Japan (43.8) and Australia (43.7), and ahead of Switzerland, Norway, Russia and Germany. Going deeper into this ranking, Canada is No. 4 in terms of “opportunity,” of which “natural resources” account for only 18 out of 67 points. On the other hand, Canada is not on the top 10 list of either “international risk” (where the U.S. took the top spot) or “domestic risk” (Venezuela).
That is not to say that we can be complacent about our attractiveness to Chinese investors, but Canada’s new rules have not scared away investors from China. We can certainly do better by improving our overall investment attractiveness beyond oil patches, but not by loosening up our government’s scrutiny of foreign government investors.