Good morning, everyone. I now call this meeting to order.
Welcome to meeting number 24 of the House of Commons Standing Committee on Industry, Science and Technology. Pursuant to Standing Order 108(2) and the motion adopted by the committee on Monday, June 1, 2020, the committee is meeting to study the Investment Canada Act. Today's meeting is taking place by video conference, and the proceedings will be made available via the House of Commons website.
I'd like to remind the members and the witnesses, before speaking, to please wait until I recognize you by name. When you are ready to speak, please unmute your microphone and then return it to mute when you have finished speaking. When speaking, please speak slowly and clearly so the interpreters can do their work. As is my normal practice, I will hold up a yellow card when you have 30 seconds left in your intervention, and a red card for when your time for questions has expired. Please respect the time limits as we want to make sure everyone has a chance to ask their questions.
I would now like to welcome our witnesses.
From the Council of Canadian Innovators, we have Mr. Jim Balsillie, chair. From Blake, Cassels and Graydon, we have Mr. Brian Facey, chair, competition, antitrust and foreign investment group; and Mr. Joshua Krane, partner, competition, antitrust and foreign investment group. As individuals, we have Mr. Christopher Balding, associate professor, Fulbright University Vietnam, from Vietnam; and Mr. Omar Wakil, partner, Torys LLP. Each witness will present for seven minutes followed by rounds of questions.
With that, we will start with Mr. Balsillie for seven minutes.
Madam Chair and honourable members, thank you for the opportunity to present today. I am Jim Balsillie, chair of the Council of Canadian Innovators.
I welcome the committee’s study on the Investment Canada Act, because it’s a critical regulatory tool for ensuring Canada’s prosperity and security. In the modern knowledge-based and data-driven economy, the sources of prosperity and the vectors of risk have changed. The act must therefore change as well to ensure it remains fit for purpose.
Specifically, first, the understanding of foreign direct investment that informs the construction of the act is based on investment in tangible production. It does not reflect the contemporary economy where the most valuable national economic and security assets are intellectual property and data.
Second, the act is based on the premise that, with FDI, the direction of the flow of knowledge and technology is into Canada. This used to be the case with FDI into industrial production. It is not the case with FDI into the innovation economy where FDI is extractive.
Third, the concept of net benefit or risk could be reasonably applied in the industrial economy based on the size of the acquired business assets. In the knowledge-based and data-driven economy, prosperity and risk do not scale with size but with spillovers.
Canadian policy remains firmly grounded in industrial-era concepts, failing to develop national strategies for IP or for data. Companies and countries now compete by owning and controlling intangible assets. The EU is building its own cloud not because Europeans lack faith in the multilateral trading system, but because EU policy-makers understand that whoever owns the IP and whoever controls the data, controls who and what interacts with it, and this has major implications for their prosperity, security and democracy.
Canada is on the sidelines in the global competition for IP and data, contributing to their creation but not contesting their ownership and ensuing benefits. Consequently, we see the exfiltration of knowledge assets out of Canada on a regular basis, across borders with the stroke of a pen, currently without any national security or economic review. For example, foundational IP for AI that Canadian taxpayers have funded for two decades is transferred from the University of Toronto to Google. Also, Huawei creates 17 research partnerships with Canadian universities for equally valuable telecom infrastructure. There are many other examples.
Meanwhile, smart countries such as Germany with its 72 Fraunhofer institutes has one central exploitation department that administers and manages IP applications, exploitations and contracts on an expert basis. Germany, the U.K., the U.S., France and even the EU created updated FDI strategies while Canada has not. Germany went as far as blocking the hiring of one of its computer engineers, a recognition by policy-makers that the negative spillovers for Germany outweigh the private returns of the computer engineer.
IP and data have strong public good characteristics, so private decisions do not price the associated externalities or spillovers into their contractual agreements.
Three aspects of the current ICA study are particularly noteworthy as inappropriate for today’s economy: one, the valuation thresholds; two, a moratorium narrowly focused on acquisitions from state-owned enterprises of authoritarian countries; and three, a principal economic focus on jobs. Very few strategic transactions would require review based on these criteria and they don’t guide the attention of policy-makers administering the act to the issues relevant in the contemporary economy.
The focus on acquisitions from SOEs of authoritarian countries is insufficient, because if the assets are critical to Canada’s prosperity, security and sovereignty, then we need to ensure they remain in our control regardless of the foreign counterparty.
Finally, there are many other economic consequences beyond jobs that must be considered, especially since the key skills for the IP and data-driven economy are in short supply. Instead, we need to ask the following questions: Where does the value proposition in our economy lie; how is the value we generate connected to our prosperity and security; and is the act structured to guide an informed assessment of a given investment into the innovation, knowledge-based and data-driven economy?
Our current approach to dealing with Canada's most valuable economic and national security assets is akin to putting an additional bolt lock on the front door, while advertising that our screen door on the side is open.
In my attached appendix, I proposed an updated analytical framework for the ICA.
I thank you.
Good morning, everyone. Thank you for asking me to appear before the committee. I am delighted to be here.
Let me begin my remarks by saying that I think the present foreign investment review regime works well in connection with its review of acquisitions of Canadian businesses. I do not think it's necessary to lower Investment Canada Act review thresholds. I do not think it's necessary or desirable to place a temporary moratorium on acquisitions by state-owned enterprises.
In my view, the act and the government's current enforcement practices already provide sufficient means to address foreign investment concerns, even during the COVID-19 crisis. There are a number of reasons for this.
First, in terms of process, the government already has broad powers to review virtually any acquisition of any Canadian business. In particular, all foreign investors are subject to potential national security reviews, regardless of the value of the Canadian business, so that's regardless of whether the business has been devalued as a result of the COVID-19 crisis.
Moreover, investors that are SOEs are also subject to net benefit reviews based on thresholds that are much lower than the thresholds for private sector investors. Importantly, the special low threshold for state-owned enterprise investors is based on the book value of the assets of the Canadian business. In many cases, temporary devaluations as a result of the COVID-19 crisis should not affect whether a review is required.
Second, in terms of substance, the government already has broad enforcement powers to protect Canadian interests and to do so on a case-by-case basis. In the case of national security reviews, the government can take, and I quote from the legislation, “any measures” considered “advisable to protect national security”. That includes blocking a deal, requiring a divestiture or imposing any conditions whatsoever on the investment.
In the case of SOE investments, there are also special requirements that SOE investors must meet in order to secure a net benefit approval. SOE investors must agree to adhere to Canadian standards of corporate governance and they must operate the Canadian business on a commercial basis. These commitments are perpetual. They apply for the lifetime of the investment and they are actively monitored by the government. In other words, there is a special rigour and scrutiny applied to state-owned enterprise investments to ensure that they operate in the same way as private actors.
In my view, it's highly preferable to continue to review investments in a nuanced and fact-specific way rather than having some type of blanket ban. With a case-by-case approach, investments that are problematic can be blocked or restructured. Investments that are not problematic can be approved to proceed.
There would also be at least three substantial practical risks and hurdles to lowering review thresholds or imposing a moratorium on certain investments.
First, as a general matter, lower thresholds or a moratorium may deter the injections of capital that foreign investment can bring. That could impede our economic reopening and harm Canadians. For example, the alternative for some distressed businesses may not be the status quo or it may not be acquisitions by Canadian buyers; it may be insolvency.
Second, an across-the-board moratorium may be controversial to implement. Labelling certain countries as “authoritarian” could exacerbate existing diplomatic tensions or create new ones.
Finally, and perhaps most significantly, there may be complex legal impediments to changing the Investment Canada Act's net benefit thresholds. That's because certain free trade agreements, such as the Canada-U.S.-Mexico Agreement, have carve-outs for the current thresholds that were negotiated terms of those agreements. In other words, I believe at least some of our trade agreements may have the effect of requiring the government to maintain the current net benefit thresholds, so a potential amendment to the Investment Canada Act in this regard may have unintended knock-on effects that would have to be carefully considered.
In sum, I believe the current regime is well calibrated to capture and deal with potentially problematic acquisitions of Canadian businesses. That's not to say there's no room for improvement. Incremental changes to the Investment Canada Act regime and its administration could be desirable. However, I see these steps as ones that are desirable in the long term and not urgently needed to address the COVID-19 crisis.
To name a few, the government should ensure that the investment review division and its sister agencies receive adequate funding to ensure net benefit and national security reviews are conducted with speed and efficiency. Second, there may be merit in providing additional case-specific guidance on national security reviews. Third, there may be merit in requiring or permitting investors to file notification forms where there are acquisitions of material minority interests, not where there are acquisitions of control, or as Mr. Balsillie has said, to give the government broader jurisdiction over transactions that do not involve acquisitions of control or acquisitions of ownership interests in Canadian companies.
With that, I conclude my remarks. I'm pleased to answer any questions that you might have.
Thank you very much.
Thank you very much, Madam Chair and honourable members. I'm grateful to be here to present evidence this morning. I am appearing on behalf of myself and my partner, Brian Facey, who's the chair of the competition, antitrust and foreign investment group at Blakes, but who is unable to be with us this morning.
We regularly provide advice to both foreign investors and Canadian businesses regarding all aspects of the Investment Canada Act. We are also the co-authors of Investment Canada Act: Commentary and Annotation, 2020 Edition, which is published annually by legal publisher LexisNexis. That book is in its eighth year of publication and is widely used by lawyers, Canadian businesses and foreign investors considering the applications of the ICA to investments in Canada.
I am presenting in my personal capacity and the views do not represent those of Blakes or its clients.
I will begin by providing an overview of the issues raised by the committee, followed by three recommendations for your consideration based on our experience. In short, we believe the Investment Canada Act and the review mechanisms do not require amendment, and no blanket policies or amendments should be adopted at this time. The ICA works as framework legislation that provides broad discretion to the minister to approve, reject or amend foreign investments on a case-by-case basis. We do believe that it is a priority area and that it is critical at this time and, in particular, that the investment review branch should be sufficiently staffed and funded to be able to carry out its important mandate.
The challenges arising from the COVID-19 crisis and faced by businesses and government are, indeed, unprecedented, and while we acknowledge the potential risks associated with foreign takeovers of Canadian businesses critical to national security, the ICA already gives extensive powers to the government to conduct in-depth reviews of foreign investments and to block or remedy any investment that raises a national security concern.
Reviews can and frequently do take upwards of 200 days to complete, but based on our experience and observations over the last several months, a blanket prohibition on investments by certain categories of investor or regarding certain industries is not warranted, and a case-by-case approach is appropriate. Imposing additional obligations on investors, especially without conferring additional resources on the IRB and its partner agencies and providing for additional transparency measures, could signal to the investment community that investors are likely to face additional red tape when trying to invest in Canada. Canada needs foreign direct investment to support a strong economic recovery.
It’s also important to keep in mind that Parliament made significant changes in 2009 to implement measures to protect national security, but at the same time it also took steps in 2015 to increase the monetary thresholds and reduce the number of economic or net benefit reviews. These changes achieved an appropriate balance between encouraging investment from our trading partners and making sure that Canadian intellectual property and manufacturing capacity did not fall into the hands of investors whose intentions may not be in the best interests of Canadians. Lowering the review thresholds would be moving backwards in terms of opening Canada up to much-needed foreign direct investment.
I'll now turn quickly to the recommendations that we propose.
Currently, the ICA does not require that investors give notice to the government before closing, unless the investment involves the direct takeover of a Canadian business whose value exceeds the applicable financial threshold. However, it is common practice for investors to notify the government before closing when an investment has potential national security implications.
In our view, this practice works well, but if changes are to be considered, they should be only in connection with investments in industries critical to Canadian national security, and trade agreement investors should also be exempted from a mandatory notification requirement before closing. The list of critical industries should be precise so that investors and Canadian businesses can easily ascertain whether or not a filing is required. Moreover, the government should not add to the already lengthy 200-day timeline for national security reviews. The investment review branch needs to have the resources and directives to triage cases quickly. Let me now turn to that.
We've also observed that when investments are under review, particularly on national security matters, the timelines can be quite long, and this is especially problematic where investors plan to establish new businesses in Canada that create jobs, conduct new research and develop products and services for the benefit of the Canadian economy. A permanent director of investments should be appointed soon, and the government should add more technical staff to the review teams that have the expertise to more quickly assess when investments raise or don't raise national security concerns.
Finally, we also encourage this committee to take steps to improve transparency during the review process. In our experience, investors are often left wondering why their investments get caught up in a national security review, and during that process, investors are told very little about the concerns and the steps that might be needed to address them. A robust national security review framework is in the interest of all Canadians, but that framework must be applied in a principled and transparent way. Investors should have the ability to meaningfully respond to concerns that have been raised, and that process should be built into the law and the regulations.
We thank you for the opportunity to address this committee on this very important topic related to Canada's economic future, and I would be pleased to address any questions that you might have.
I will say at the outset that while I am not an expert on Canadian investment law, I believe I have the necessary expertise to speak on the threat of state-owned investment.
Ladies and gentlemen of the committee, thank you for giving me this opportunity to talk with you today on a topic that I believe is of great importance in the world today. I say this as an economist and as a citizen of a democratic country concerned about the influence of authoritarian states across a variety of sectors.
By intellectual belief, barriers to trade, investment and the free flow of labour are an anathema to me. I have spent most of my career working in Asia and teaching at universities promoting these ideals and values. I believe open liberal democracies benefit from their openness.
However, after working for nine years at Peking University HSBC Business School in China as a public employee, I was mugged by the reality of modern China and strong-armed authoritarianism. Modern China under Chairman Xi stands in stark opposition to the values that Canada, as an open liberal democracy, holds dear.
How do we balance the demands of open markets with the very real threat of predatory subsidized state-owned enterprises? To answer this question, we must first answer the question about the threat posed by expansionary authoritarian-controlled, state-owned enterprises. These are companies that are using public funds to target strategic enterprises and control key resources, assets or technology.
In China, we see many examples of state-owned or -linked companies receiving enormous state largesse to help them expand abroad. Whether that is providing vendor financing that would not be allowed under OECD rules, state-backed finance to make acquisitions or industries targeted by political leaders, state-owned and -linked enterprises from authoritarian states receive significant benefits that private enterprises in the rest of the world do not receive. They also target assets, whether in natural resources or technology, that are prioritized by political leaders rather than market forces. We have seen examples where China buys foreign technology companies and attempts to move the entire operation back to China. This is not market-force behaviour or even the behaviour of a trustworthy counterparty.
Arguably more worrying, we have seen examples where China tries different methods to avoid scrutiny of its investment activity and uses a variety of measures to disguise its activity, whether it is third party investment via various funds or whether it is failure to submit foreign investments for regulatory scrutiny, which later require forced divestment. In other examples, they have offered enticements to strike deals, offering opening the Chinese market if technology is transferred to them.
We have evidence that China keeps detailed records about intellectual property held by firms, with a range of related information that value the asset. It is clear that China has a targeted list with a hierarchy of technologies and intellectual property assets. All these behaviours raise valid concerns about the authoritarian Chinese state as a trustworthy counterparty in international investment.
Given the clear risks we see associated with investment from China, I believe it is in the best interest of Canada to seriously think about the risks associated with a country that has demonstrated a clear pattern of threatening and predatory investment behaviour.
I will be willing to take questions from the committee.
Thank you very much.
I think it's very fair to say that a lot of these investments are made much more for influential purposes or for Chinese state strategic purposes. For instance, there is a U.K. semiconductor company that was sold to a Chinese conglomerate, and part of the agreement was that it would remain in Britain. There's currently a national security fight. Basically the Chinese are seeking to move the entire company out of Britain and, effectively, leave little or no staff in Britain.
It's not just influence, but there's clearly influence targeting. There is also very strategic.... Does this meet China's strategic goal, in this specific case, China 2020 to 2025, and its desire to upgrade semiconductor manufacturing output?
It's also very important to note that for what you referred to as “influence”, there are many examples in the investment world like that as well. Basically they seem to be less about economic and financial returns and much more about state policies.
Thanks very much, Madam Chair.
Before I get to the witnesses, the clerk did circulate a notice of motion. I just want to make sure it is a matter of public record today. I'll move it on Thursday, but just so everyone is on the same page, the motion is:
That, pursuant to Standing Order 108(2), the Standing Committee on Innovation, Science and Technology invite senior representatives from Loblaw Companies Ltd., Metro Inc. and Empire Company Ltd. [which owns Sobey's] to explain their decisions to cancel, on the same day, the modest increase in wages for front-line grocery store workers during the pandemic, including how those decisions are consistent with competition laws.
I know a number of us were quite frustrated to see that decision taking place, and I think it's important on behalf of Canadians that we have these companies in to explain themselves. Hopefully, they don't talk to one another first.
My question on the Investment Canada Act is the same for all the witnesses. We heard previous testimony to the effect that the policy guidance in mid-April that was issued by the minister's office effectively says there's going to be greater scrutiny on state-owned companies or companies that are associated with authoritarian regimes. There is currently additional scrutiny should those acquisitions be proposed. We heard some witness testimony, though, that rather than that policy direction there ought to be firmer guidance with greater specificity. Out of all of the witness testimony, that seems to be a recommendation that is reasonable.
I wonder, starting with Mr. Wakil, if that's something that you think we ought to support.
It is something that I think we should support. I should say by way of additional background that I think the government has, over the years, done a good job in trying to increase the transparency around national security reviews under the Investment Canada Act. The annual report that the investment review division issues is a valuable source of information to members of the bar and to foreign investors and Canadian businesses seeking foreign investment with respect to statistical information about the types of national securities that have been undertaken, the outcomes of the reviews, remedies and the timelines. There are also guidelines on national security reviews that are also helpful.
However, as I said in my opening remarks, I think additional guidance would be necessary. Investors in Canadian businesses don't mind having rules, but they like to have as much certainty about the rules as possible.
Additional guidance that may be helpful is case-specific guidance to the extent that's possible. Sometimes these national security reviews, by their very nature, inhibit the disclosure of information that may be valuable. I think there is additional guidance that the government could give as it obtains additional experience with national security reviews in case-specific situations, more information about the industry that was of interest to the government or information about the outcomes of the review.
Thank you, Madam Chair.
Mr. Balding, you mainly painted a picture of the Chinese power, which is apparently managing to take advantage of certain bankruptcies. Although the Chinese model is that of a market economy, it is still a system of collusion between large industrial groups and the state. So it is a very aggressive model.
However, there is also a form of collusion with large industrial groups from those same liberal democracies. For example, the Chinese model often works hand in hand with foreign multinationals.
At the end of the day, doesn't the issue come from us being dependent on China? That was on display with medication and rare metals, among others.
Is this not also an issue of collusion between the Chinese state and Canadian and U.S. companies?
I think there is a lot of truth to that. For instance, in key sectors what you will frequently see is that the CEO of, for instance, the first China telecom will become the CEO of China Unicom, who will become the CEO of the next Chinese telecom company. They are really all one company.
That's one of the things I think is very important to note. A lot of times, a company of any size from China, if they are investing in Canada with any significant amount of money, they clearly have the state blessing and they have been provided funds from Chinese banks in different ways, as well as access to foreign capital.
When you talk about that level of state and enterprise collusion, that's a relatively accurate statement. There's this marriage between business and the state. That's why I said earlier that they are essentially given industries that they need to go out, and if they are investing abroad, there's a certain list of industries they are supposed to be investing in.
For instance, although China is a member of the World Trade Organization, it is not a founding member, and although it is part of it, we can say that the way it operates contradicts the World Trade Organization's model. So what can be done?
The relationship between Canada and China may have been excellent in the past, but that is no longer the case. Just a few years ago, there was talk of concluding a free trade agreement between Canada and China, and now the idea has been dropped completely. The relationship has turned sour. However, despite everything, this form of collusion continues.
Once again, what can be done?
If we're focusing on investment in Canada, the basic question is what we think of as national security. This is a question that countries around the world, especially in light of COVID, are re-examining right now. Even six months ago, if somebody had said that basic medical equipment like PPE was to be considered national security, nobody would have taken that person seriously. Now, that is front and centre in everyone's thoughts.
I think one of the first things that we have to think about.... I notice that today we're on Zoom. Zoom is basically a Chinese company. All of their encryption, everything goes through China right now. My understanding is that this video is going to be made public, but if it were preferred to be private or secure in some way, this could cause real problems for the Canadian government.
I think one of the things is that—and I would agree with some of the other witnesses who have spoken about this—there's a double-edged sword here. There needs to be transparency as to the rules and what the procedure is. It also needs to be noted that China uses that transparency against governments like Canada's and has taken steps to make sure that its investments avoid scrutiny or regulatory detection, and then, after they're forced to divest or something like that, they already have the necessary data or IP to go off and make their own product.
There needs to be a balance struck between the necessary transparency, which I agree with the other witnesses on, and keeping certain information confidential for the government.
Thank you, Madam Chair.
Briefly but importantly, I want to thank Mr. Erskine-Smith for bringing that motion forth. I'll be supporting that motion.
It's unreal that during this time, when our system of monopolization has resulted in significant revenues for grocery stores, this would take place. I'm hoping we can do a further analysis with regard to a riding like mine, where there is disproportionate reduction in service in poor and more challenged areas, versus more economically advantaged areas. That is also reflected in staffing, consumer supports, pricing, the way the facility looks and its overall business plan for the area. In fact, some areas are not even serviced by some of these chains because of the challenges they present. I hope we can have a good discussion about that because nutrition is important for equality, and there is a problem of systemic discrimination among these chains with regard to some of the services they're providing in certain neighbourhoods.
With that, my first question is for Mr. Wakil and Mr. Krane. Keeping the status quo is, for the most part, what you're advocating, so what specifically has Canada gotten right that other countries are doing wrong? I ask this because an analysis of this shows that we're different. What tangible results and specific statistics can you point to that have economically advantaged us, either through the creation of new products and services or GDP, because of the type of system we have, which is different from those of other countries?
Maybe Mr. Krane could answer first, and then Mr. Wakil.
I'll try to take a shot at it, sure. I think my first response is that Canada is highly unusual compared to other jurisdictions in having an economic net benefit type of review for foreign investment. The vast majority of countries have either a national security review of foreign investments or no review of foreign investment whatsoever. Canada, along with Australia and a handful of other jurisdictions, is in a highly unusual and small group of countries that review certain inbound investments for benefit.
Second, with respect to your specific question, you're asking for information that, to my knowledge, has not been collected or analyzed by the government, which would be very difficult or challenging to do. Part of the reason that it would be challenging to provide you with an answer to that—that is to say, on the benefit of the net benefit regime—is that we don't know the “but for” scenario. We don't know what would have happened to that Canadian business if the foreign investment hadn't happened.
I can tell you from personal experience, anecdotally, that there are a lot of investments that have worked out very well. There are a lot of investments where, as I said in my opening remarks, the alternative to the investment was insolvency, and the foreign investment, the injection of foreign expertise, the injection of foreign capital, helped the Canadian business and saved jobs, and so—
Thank you very much, Madam Chair, and hopefully my Internet connection stays hooked up.
This is to both Mr. Balsillie and Professor Balding. The rest of the world seems to understand the importance of what is happening as far as IP is concerned. Perhaps after Wednesday's vote with regard to the UN Security Council, we can get back to focusing on Canadian jobs and giving proper attention to policies for Canadians.
Professor Balding, you mentioned the following in a tweet: “Beijing has made it clear for sometime it wants to do away with the liberal international order. Continued multilateral steps toward openness and respect for human rights are dead if you accept the Chinese vision.”
As someone with intimate knowledge of the Chinese government and their economy, I wonder if you could put this into the context of our study on the Investment Canada Act. We've heard testimony, for example, that suggests that Canada needs to clarify its foreign investment rules, and as the COVID-19 pandemic puts the country at heightened risk of strategic takeovers by aggressive foreign actors like China, the suggestion has been made that potential takeovers by Chinese state-owned enterprises in particular could be used on behalf of the Communist Party of China to advance its foreign strategic interests.
Over the short and long terms, could you expand on what you believe are the foreign strategic interests of the Chinese government? What are the risks to Canadian assets? Should we impose a complete moratorium on these investments, or at the very least significantly strengthen the national security provisions of the ICA?
Thank you very much for that question, Mr. Dreeshen.
I think that is an accurate statement I tweeted. Let me start by explaining a little about how the Chinese economy works and their strategic investment objectives, which play into this.
Every year, they are given a list of prioritized sectors. Right now they have nine sectors that are prioritized. We see these sectors getting vast sums of money to invest abroad and domestically. The sectors that we see being prioritized are politically motivated sectors. We see this fundamentally in the performance of the firms. Believe it or not, Chinese firms, especially the SOEs, have very low return on assets and equity, some of the lowest in the world. Large cap companies in the Chinese stock market have been yielding about 1% annually for the past 25 years.
Then we also see this in how capital is allocated within the country and abroad. As a simple example, they have prioritized sectors like big data and facial recognition, primarily for domestic security concerns. When they are talking about things like artificial intelligence at the University of Toronto and some of the other highly skilled areas, they're using that technology in ways that liberal democracies might not appreciate.
Even if it is not necessarily a firm that is purchased, with the jobs being relocated out of Canada, at the very least it probably bears a second look at what some of these Chinese companies are doing, especially with technological resources and how they are being used in places like Xinjiang.
In how Chinese companies are investing abroad, we see very clear examples where they will work through venture capital firms to access the technology of a target firm and gain access to its technology and then either copy or license that technology—there are many different patterns this has taken—so that the technology can essentially be exported to China and used there. We've seen examples in the United States and other countries where they have not submitted to a national security review.
We see this as the behaviour we're dealing with, and when we talk about a rules-based order and the standard economic practices that we take for granted, they are not something that China abides by, typically.
I share Mr. Balsillie's concerns that there are gaps in the legislation. I think the legislation as it's currently drafted does a very good job with respect to monitoring the acquisition of controls of Canadian entities. In certain instances, there may be jurisdictional scope for an acquisition of an intellectual property asset to be caught by the Investment Canada Act and reviewed by it.
I think it would be worthwhile to do exactly what Mr. Balsillie says and think about whether or not there are any gaps. I think there are arguably gaps with respect to its scope, and that is with respect to transactions that do not involve acquisitions of control, or acquisitions of ownership interests in other entities or assets. There could be situations where technology transfers undermine national security but are not caught by the jurisdictional scope of the act.
I do think the act does a great job, and my response to the question that the committee is considering in these hearings, with respect to whether or not there ought to be threshold reviews or moratoriums, is that the act doesn't need to be changed.
With respect to non-COVID-specific issues that are broader in nature, should we periodically re-evaluate the act and whether or not it needs to be upgraded? Yes, I think we should.
Thank you, Madam Chair.
Once again, welcome, witnesses, to our committee. It is very informative.
Mr. Balsillie, I'm going to focus my whole five minutes on asking questions and exploring IP and the contemporary economy that you talked about, IP and big data.
As I was prepping for the meeting, I was looking at the number of applications that have been submitted, the dollar value, the threshold, etc., but nowhere could I find the number for the IP associated with these investments. When I looked at the $428 million in assets, I was trying to get a definition of the asset, and whether or not the IP includes the asset. I was looking at different state-owned organizations, for which it's $1.6 billion, or $1.07 billion.
I come from a management consulting background. I worked with a lot of Fortune 500 companies as well as small businesses. Even from the Government of Canada industry department, which is spending $2.2 billion scaling up organizations—and these guys come with a lot of IP—I could not find any indicators of the number for the IP going to foreign investment or foreign countries, regardless.
I know most of our investment is going to the U.S., 54%. The rest is going to the EU at 24%, and 5% to China, but I could not get any data around IP. Do you have some data around where our IP is going?
Yes, there was a recent IRPP study, which basically said that an overwhelming proportion of Canadian IP is leaving the country. As well, WIPO recent reported that we're the only large AI country that's had a decline in patents filed in the past three years.
For 20 years, Canadian taxpayers have funded foundational AI IP that is transferred to Google without any review, and Google has said it's in all their products and worth billions of dollars a year in their profits. Seventeen of our top researchers in strategic telecommunications are working with Huawei, with no form of strategic review in either research funding or our ICA.
As I said, we have a big screen door at the side with a sign that says, “Please enter here”, while we're talking about another bolt on the front door.
Thank you, Madam Chair.
My question is for Mr. Wakil.
In your presentation, you talked about the possibility of progressively amending the act. In my opinion, to be able to amend the act, we must understand it, and to understand and assess it, we will need transparency.
Would you agree with providing access to archives and with reviewing ministers' decisions to determine what reasons they used and what conditions they imposed under the Investment Canada Act? Would you be open to doing that in order to better understand the act's weaknesses?
I would be agreeable to a proposal to engage in an ex post
review of investments to measure the effectiveness of the Investment Canada Act.
With respect to the specific proposal or suggestion to open the archives, I would hesitate to do that. There are statutory protections for the confidentiality of information that investors have provided to the government in the context of their reviews. I think an opening of the archives would risk breaching those statutory provisions, and investors take great comfort in the fact that their sensitive business information will be treated confidentially in the context of a review.
Some form of review to assess success or failure, I think, should always be welcomed and endorsed, but the specific opening of the archives I would not recommend.
Thank you, Madam Chair.
Part of the challenge we have right now is the fact that the Investment Canada Act was changed in 2013 under the Harper administration, through a budget bill. What that meant was that there were no committee undertakings with regard to this as a specific file. In fact, in the subsequent Parliament, I had a motion to do just that, which didn't come to fruition either.
What that means is that we've never had a robust discussion, nor an opportunity to discuss the intricacies and also the changes necessary for updating. In fact, we saw the threshold go up, in 2017, to $1 billion. All this was done with zero public input with regard to an actual bill and zero consultation open in a democracy.
Mr. Balsillie, do you think there would be an interest from stakeholders in various sectors to actually now participate in a more wholesome review of the legislation, given the fact that even when we talk about the review that was done in 2013, prior to that it was decades before there was anything meaningful done on this bill?
Yes, the stakeholders are Canadians, so the most important thing is to understand what we need to be prosperous and sovereign in a changed world.
That's why I talked about public goods versus private interests. You have externalities or spillovers that aren't priced in an individual's decision, and that's why I mentioned the computer engineer who may take a job with an SOE in Germany, and that's good for him because he or she gets a raise, but it hurts the country overall.
I know very directly that those who are administering these policies are looking for political direction on this, so it has to be a lens of the country, not a specific sector, because they'll just look after the narrow private interests, not the broader externalities or spillovers.
Thank you, Madam Chair.
First, I will put on the record that the Conservatives are supportive of the motion that Mr. Erskine-Smith moved. We are particularly interested in the context in which that decision was made, given that the Liberal government allocated $12 million to Loblaws for refrigerators in the last Parliament, I believe, or earlier this year.
We're also interested in the working conditions front-line workers would have been subjected to during the COVID crisis. It will be a great conversation. We hope we will also have representation from the workers with regard to that study, so we will be supporting that motion.
Mr. Balding, I'm going to start by directing some questions to you. I'll give you two pieces of context for this study that I as a legislator have found to be interesting.
First, Canada is unique, as all countries are, but we don't have the same level of large-scale capital that other countries might have access to, broadly speaking, in terms of being able to capitalize up big, let's say, natural resource plays, so often we look to FDI for that type of investment.
The second piece of context was my experience in trying to find witnesses for the study. I think among five different areas there may be conflict or a desire to keep the status quo. The first would be when I think about the amount of money that comes from mergers and acquisitions related to state-owned or state-influenced enterprises for authoritarian countries. That's a big piece of business in the Canadian legal community, as well as in the Canadian banking community.
I also think about Canadian universities, where there is a propensity for the university administration to attract students from authoritarian countries, given that as international students, they pay our universities a lot of money to go there. Also, my background is in parapolitics, intellectual property management and sponsored research at various Canadian universities, and there is a push to participate in various sponsored research contracts with either authoritarian governments or state-owned or state-influenced enterprises from those countries.
Then, of course, our government right now is in the middle of a very significant push to secure a UN Security Council seat, which has its own politics associated with it, so I find there's this propensity to not talk about this. It's like, let's just ignore everything and hope that the status quo continues.
Given that you sort of sit outside those baskets of potential conflict, I'm wondering if you could point us, as legislators, to other countries or perhaps other witnesses who might not be tainted by those particular glasses and might help us with our deliberations on how to move forward.
Thank you, Madam Chair.
Thank you to all of our witnesses for being here with us today to answer our questions.
My first question is going to go to Mr. Wakil.
In the Investment Canada Act, the concept of national security is not explicitly defined so as to give some leeway to the in consultation with the to flag or review any investments that seem to be a threat to Canadian security and that seem to be injurious to Canada.
Given this, do you think that the flexibility and the fact that it's not clearly defined have some negative consequences on our security? Do you think there should be at least some lower limits that people need to guide themselves by, considering governments change and different ministers are responsible at different times?
I think it's important to have flexibility, and I think it's difficult to balance the need for flexibility with the need for certainty. I think the government has tried to do a good job in balancing that over the last couple of years since the national security review regime was introduced.
The act, as you say, doesn't have a definition of national security. It's issued guidelines with respect to what national security can include. It's provided disclosure in its annual reports about the sorts of cases that it's reviewed under the national security review regime, the countries of origin of the investors, the industry sectors that it's investigated, and that sort of disclosure is good, helpful and useful to us, but I think that incremental change would be better. Incremental change would be useful. That is to say, enhanced disclosure of specific cases and more disclosure along the lines that we have as the government gets more experience with the national security review regime would be helpful and desirable.
Do I think wholesale change is needed? No, I don't. I don't think the government should say, “Here's the list of 10 things that are national security and will always be national security”. That's an exhaustive list. I think it should continue along the path that it's on, and just continue down that path.
Yes, I do think the act is, generally speaking, well written. It covers a lot of transactions, a lot of foreign investment acquisitions—virtually all. Where I think there is a potential gap is in some of the areas that Mr. Balsillie has been talking about, which is with respect to technology transfers.
For example, if you acquire a company with sensitive IP, that is subject to review. If that company enters into an agreement with a foreign entity to transfer that IP to the foreign entity, that's not subject to review. The effect is the same—the foreign buyer, the foreign entity, has control of the IP or has access to the IP—but one type of commercial arrangement is subject to review and scrutiny, and the other type of commercial transaction, commercial arrangement, is not subject to review and scrutiny.
I think it would be prudent to look at the legislation to see whether or not there are gaps that can be filled, like the one that I just gave by way of example.
Thank you, Madam Chair.
During testimony today, some witnesses have alluded to the fact that we really don't have a timely way of knowing if takeovers are happening unless a publicly traded company has had to tell its investors or until the takeover is finalized, so that's a feature that's somewhat unique to the Canadian system, I would think.
I'm just wondering, Professor Balding, if you want to speak at all to the principle of transparency in terms of any sort of review framework that countries around the world have implemented to have some public awareness of what is happening with regard to state-owned enterprises or state-influenced enterprises' investments into countries, and particularly if you want to speak to best practices.
I think there are two specific issues. The United States was addressing these very same issues roughly, I think, one or two years ago, 18 months maybe. They basically found themselves at a very similar point where they had discovered a significant number of transactions either in minority states or, as Mr. Balsillie has alluded to, and I believe Mr. Wakil also alluded to, technology licensing, various things like that which were designed to avoid review.
Even in the United States, it was basically on the honour system, so that foreign investments were submitted by the acquirer for review. They basically reviewed that system, found a lot of the same gaps that I'm hearing about today and tightened up in a lot of the same way, so whether it was licensing of sensitive technologies, whether it was minority stakes or whether it was through things like venture capital funds that would take stakes through third parties. I would agree with the previous witnesses, Mr. Balsillie and Mr. Wakil. I think there are probably gaps and tightening that should be used.
I think specifically in the case of China, we need to make sure that it's not simply state-owned enterprises but whether the state has a stake or whether it's a state-linked firm like Huawei, which is not technically state owned but is in reality state owned. There are a lot of definitional issues around what exactly is state owned.
We're struggling with that in Canada as well. I'm hearing the lexicon change more toward state influenced. It seems to be a definition that could be more tightly defined and used.
I guess I would also switch to your knowledge of enforcement best practices. Broadly speaking, in Canada, without going into technical specificity, if there are conditions put on an approval of a takeover, there's really limited enforcement capability within our legislative framework right now. I think it might encourage bad actors or, basically, “So what?” might be the outcome.
Could you speak at all of anything you know in terms of best practices on tightening enforcement if there are conditions placed on investment, and if there are any other jurisdictions in the world that we should be looking to in terms of best practices to strengthen that aspect of our legislative framework?
I think most of the European countries that I have dealt with, with regard to Chinese investment, are probably at a very similar point. Most of them are reviewing their investment practices. This is debated in Europe.
In the United States where we see that there have been a couple of transactions, for instance, in which Chinese purchasers either made or began to make the acquisition and it's debatable whether or not they expected it to fall apart, but they got access to sensitive technologies and then walked away or decided not to submit in one case. Then in another case there was a forced divestment because of the gay dating app Grindr, which basically exposed users around the world to Chinese government users.
These are questions that I think, honestly, everybody is dealing with. For these specific issues there are no best practices that I know of, because they are still relatively new issues globally.
I do. Thank you very much, Mr. Longfield.
One of the risks of having blanket rules is that we don't always see what the unintended consequences of those rules might be. For example, Canada is still quite reliant on other countries for PPE, and we are co-operating with other nations to develop vaccines and treatments for COVID-19, which is affecting not just Canadians but citizens from around the world. I will note that the government did announce a research partnership with a Chinese company to work on developing the COVID-19 vaccine in Canada. My concern is that if we impose blanket restrictions on investment, maybe we don't benefit from those opportunities, and we impact our ability to work co-operatively with other countries on goals that are mutually shared.
I don't disagree with Mr. Balsillie that there are areas where we need to have heightened scrutiny and where we should be focused on protecting critical industries and critical technologies, but having blanket restrictions does send the wrong message to the world: that Canada is not open for business. We need to collaborate with other nations to achieve common goals.
I had a Zoom meeting earlier this morning with the all-party health research caucus, in which we had scientists from across Canada talking about the importance of sharing information in order for us to attack a global pandemic together and how there will be a global recovery we have to attack together. I think we're much more connected than we even realized through the unintended consequences.
As a quick follow-up on that, in our act right now, we have a national security review, of course, and at this point it's open to interpretation, which gives us some flexibility, and then we have the net benefit review. Do you see any need to change either of those portions within the act?
The Investment Canada Act is actually working quite well at the moment. It does cover, at least on the national security side, the vast, vast majority of investments in Canada. I do agree there are situations that may not be covered by the Investment Canada Act, but even situations in which a company would acquire an important piece of technology could be considered a reviewable national security investment under the right circumstance if that asset was important and an important part of a company's business. The act does cover that.
To another point that was raised earlier, there is no evidence that companies are avoiding filing notifications under the Investment Canada Act. Foreign investors who come to Canada don't know the rules here and will work closely with legal counsel and with advisers to make sure when they do invest here they're given guidance on how to comply with Canadian law. In my experience, investors are actually quite cautious about making sure they do comply with the law. In my experience, investors will submit filings to the government to advise them on a transaction. Where the government has expressed concerns, they don't hesitate to let us know. That commences quite a lengthy and detailed investigative process that, as I mentioned, can take upwards of 200 days to complete, which is twice as long as the process in the United States.
Thank you, Madam Chair.
Mr. Balsillie, frankly, your comments have been among the most relevant we have heard in this committee. I would like to take things a bit further and hear your comments on the notion of stakeholders in the act. Last week, a witness said that the act should include shareholders, employees, suppliers, creditors, consumers, the government and the environment.
Do you agree with the idea of amending the act and integrating those stakeholders into it?
In light of your testimony today, patents and innovations should also be enshrined in the act, as should strategic technologies.
I'll try to answer that.
The first thing I'd like to say is that Mr. Krane was characterizing my testimony as a blanket thing for all investments, and I was talking about a particular lens for the nature of the externalities and spillovers from technology, which is absent from the contemporary economy.
For MP Longfield, I'm for Canada here. When we look at these things, we've learned that technologies affect our health, affect our security and affect our economy, so when you interview stakeholders, the most important thing is that this is supposed to be a public good, a net benefit test, in which you look at the overarching effects of these things. You should interview many stakeholders, but ultimately, you need experts to measure these various effects. I've had considerable interplay with those who administer the ICA, and Huawei is considered a Canadian company because it has a Canadian subsidiary. They ask us to voluntarily bring forward things if we're taking investment because there might just be a problem, and I'm deeply involved with a number of technology companies.
People are making decisions based on their narrow and specific interests, and it's up to our policy community to make sure that these are in our national interests.
Thank you, Madam Chair.
I don't know who said it, but I know I just won a bet with the “not open for business” slogan. I had predicted with my staff that I would hear that today, so I've won a coffee from Tim Hortons, which is now going to benefit 3G Capital, which has, in essence, allowed Canada's iconic coffee maker to drop from 13th to 67th in Canada's reputable companies, representing the biggest slide in history for that.
At any rate, I do want to ask Professor Balding a question here. Even private equity firms are unknown investment options in terms of a review as well. Should that also be a concern? There are a couple of factors we need to consider here. Canadians, through either corporate tax cuts or direct subsidies municipally, provincially or federally to acquire jobs or even research and development grants and waivers of costs, contribute to the economic growth and development of some of these companies through the jobs. When they are taken over, whether it be by China or other non-democratic governments, we don't know what we're getting into.
Is there a benefit to reviewing ownership that might come through another model?
Mr. Wakil, we were talking earlier and I want to go back to that. It's with regard to the evidence that's out there in terms of measuring. I think it's a fair discussion that there isn't enough out there.
How do we go about changing that? I think it is, at some point, logical to do some type of metrics when a company is purchased in Canada, related to what patents or what types of innovation are then brought to our country from somewhere else, versus what exits from the country.
Are you aware of any model out there that another country is doing? I think that's a fair way of evaluating. Otherwise, when we look historically at some of the companies that we've lost, we don't seem to go back to review whether what we're doing makes sense or not. Hence, since we have not had a comprehensive review of the Investment Canada Act, wouldn't it be a logical thing to at least measure the success or failure of the model we have?
I think it certainly is something that would be worth exploring to determine whether or not there could be a methodology developed that would give us an accurate assessment of whether or not the Investment Canada Act regime, or at least the net benefit portion of the regime, has worked well over the years.
A problem we would have is one that I began to flag in my earlier comment, which is the “but for” scenario to the extent that...and that's the problem with the assessment of investments now. For example, the government's trying to predict the future. What is the likely one, two, three or four years going to look like for the Canadian business and how does that align with the investor's plans, and is that beneficial or not? Is there a benefit to proceeding with the transaction based on the likely future outcome of the Canadian business? That's a very tricky and complicated assessment to make.
We have a similar problem with respect to the ex post review of an investment that's completed. What would have happened if the investment hadn't happened? Do we have the information available? Conceptually, I think it would be worthwhile to look back and see whether or not it would be possible to construct a test to evaluate the success of the legislation, but I can see that there would be a lot of practical challenges with that.
Thank you, Madam Chair. I'm very grateful for that.
Given that this is the last round of questioning, I think it will be devoted to mopping up and to clarifying anything I've had a hard time understanding.
One of the members of this committee was suggesting that, after reviewing the annual report, they could not determine which one of those acquisitions had an element of intellectual property that had been acquired as well.
Mr. Wakil, if I can go to you, I don't think it's the job of the annual report to clarify which acquisition involved IP and which one didn't. Am I correct in that assumption?