Screening foreign acquisitions may discourage Canadian business

The Investment Canada Act, which screens foreign acquisitions of Canadian companies, doesn’t serve the interests of Canadians, finds a study by the Fraser Institute.

“The unintended consequences of the Investment Canada Act can reverberate through the entire economy, depressing prices for Canadian assets and discouraging entrepreneurship,” says Steven Globerman, Fraser Institute senior fellow and author of An Economic Assessment of the Investment Canada Act.

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Currently, foreign acquisitions of Canadian companies above a certain size are reviewed under the Investment Canada Act. Foreign buyers must demonstrate that their acquisitions for example, purchasing an oil company, will benefit Canada above and beyond the benefits realized under existing Canadian ownership.

For example, foreign buyers must prove that, post-purchase, they’ll create more jobs for Canadians, increase output, and increase research and development.

Defenders of the act say these conditions benefit Canadians, and note that very few proposed acquisitions have been blocked. But the screening process likely does more harm than good.

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Why? Because the act’s conditions essentially represent an increased cost for the buyer, and consequently, will result in lower bid prices for Canadian companies. A lower bid price means a lower sale price, which means smaller gains for Canadian owners of companies targeted for takeover.

This ripple effect may discourage Canadian entrepreneurs from starting or expanding businesses—the lifeblood of economic and employment growth in the country.

“The costs of screening are likely to outweigh the benefits, so Canadians would be economically better off if the screening process was abandoned, except perhaps where national security is a concern,” Globerman said.

Read: Canadian companies ripe for M&A, says report

The act may also prompt some stakeholders of Canadian companies (head office managers, for example) to lobby for certain conditions of sale such as an expanded Canadian head office. When successful, this type of lobbying diverts company resources away from more productive activities and investment.

Finally, unless the market for investment in Canada is as competitive as possible, Canada may attract fewer investors, to the detriment of the economy.

“We live in a global marketplace where investors are able to pick and choose where to invest. For Canada to remain competitive, and for Canadian companies to remain attractive to investment, undue red tape must be avoided,” Globerman said.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.